A Reverse Mortgage May be a Financial Solution for a Late-Life Divorce.
Late-life divorces, also known as “Silver Divorces,” pose unique financial challenges that can be successfully navigated when the right tools are used. Reverse mortgages may be especially beneficial for homeowners, 62 years or older, who are getting divorced. If you are going through a late-life divorce—or are a divorce attorney or financial advisor providing counsel to someone who is—this information can help guide you in deciding if a reverse mortgage is the best option.
According to the National Center for Health Statistics and U.S. Census Bureau, the divorce rate for those 65 and older has roughly tripled since 1990. Along with retirement planning and health care needs, late-life divorces pose other complex challenges, including the division of home equity. Divorcing couples, along with their attorneys and financial advisors, have mitigated the financial, emotional and legal hardships of splitting this asset by taking out a reverse mortgage loan.
What’s a Reverse Mortgage?
A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), is a special type of federally-insured, non-recourse loan that allows qualifying homeowners 62 years or older to convert the equity in their home into cash. That money can be used to finance living expenses, home improvements, in-home care, or anything they may want or need. In the case of a divorce, it can be used as a financial tool in the division of assets—specifically, home equity—and maintain quality of life for both individuals.
How Can a Reverse Mortgage Help in a Late-Life Divorce?
There are two important economic concerns that are relevant to the silver divorce and the reverse mortgage: wealth accumulation and considerations of retirement income. By age 62 and older, wealth is likely to have accumulated in the form of home equity and investment portfolio, such as 401(k) accounts or rollover IRAs. Also, by the age of 62, people are approaching or have reached retirement. Therefore, financial considerations relating to retirement income are often top of mind. A reverse mortgage can help you tap into your accumulated wealth, while still protecting your portfolio.
More times than not, the marital home is the largest asset of an average 62-years-or-older American couple, so the division of that asset comes with unique challenges. While the division of a 401(k) or IRA is significant, the largest asset is still, typically, home equity. The marital home also signifies emotional security, and is where the individuals likely feel most comfortable—especially if in-home care is needed. Used thoughtfully and responsibly, a reverse mortgage will allow one spouse to live in the home by “buying out” the other—which can alleviate monthly mortgage payments for both parties and substantially improve retirement income for both.
In order to qualify for a reverse mortgage, the borrower(s) must: (1) be at least 62 years-old, (2) own the home outright or have a mortgage balance that can be paid off with the HECM loan proceeds, (3) have the resources to pay ongoing taxes and homeowners insurance (4) live in the home as a primary residence, and (5) receive HECM-certified counseling prior to obtaining the loan.
Silver Divorce Example: Mr. and Mrs. Smith
Here’s an example of how a reverse mortgage could be used to navigate a late-life divorce.
Let’s say that Mr. and Mrs. Smith own an $800,000 home free and clear and they have $800,000 in their investment portfolio. Typically in a divorce, one would keep the house while the other would keep the portfolio. In other words, one has a house with no money to live off of, and the other has money and no house (and likely having to pay monthly rent in a new residence). This is what one could consider a lose-lose situation, and one where retirement may have to be pushed off for one or both individuals.
In this case, a reverse mortgage can result in a win-win. Let’s say that through the divorce settlement, Mrs. Smith stays in the home and use a reverse mortgage cash-out refinance to essentially “buy out” Mr. Smith. She obtains a reverse mortgage loan of $400,000, which is transferred to Mr. Smith. Subsequently, Mr. Smith can now use the $400,000 settlement he received as a down payment on a new home, and obtain his own reverse mortgage to fulfill the purchase costs (known as a HECM for Purchase.) Neither party would have to make monthly mortgage payments or pay rent, alleviating a huge financial burden. Then, the investment portfolio can be divided to cover other costs of living.
This is an important financial decision that should be explored by the individual spouses—and their divorce attorneys and financial advisors—in order to optimize the benefits of a reverse mortgage loan. When used correctly, it can result in a settlement that is best for all parties involved.
I have helped many spouses, divorce attorneys, and financial advisors use a reverse mortgage to get through the financial hardships of a silver divorce. If you are going through a late-life divorce—or are providing professional or legal counsel to someone who is—contact me today to learn how a reverse mortgage could be a viable tool and a win-win solution.
Mary Jo Lafaye is a Reverse Mortgage Expert based in San Rafael, California.
She can be reached by phone at 415/259-4979 or by email.
For more information on Reverse Mortgages, visit Mary Jo’s website.