Dealing With A Divorce With A Reverse Mortgage

Divorce for seniors, or “gray divorce” as it has been dubbed, can be a significant problem for both spouses involved. Besides deciding on how to split assets, senior divorce can bring other issues such as strained finances, tax burdens and health problems. It can also place larger burdens on adult children and government resources.

If You Are Divorced, Getting Divorced or Thinking About Divorce You Are Not Alone

Divorce rates among those 50 and older more than doubled from 1990 to 2010. For those 65 and older, the risk of divorce has doubled as well. [1]

More than 55% of divorces were couples that had been married 20 years or more. [1]

Older adults are unlikely to recoup financial losses associated with divorce, and this is particularly true for women who were out of the labor force for decades. [1]

If you have assets such as stocks, bonds, IRA, 401K, pensions, gold, silver, real estate or other assets I would highly recommend working with a Certified Divorce Financial Analyst. They can work with you to come up with an equitable outcome that helps minimize tax burdens.

Since I am not a financial planner, CPA, or lawyer, I am only going to share with you some options you may want to consider with the reverse mortgage.

Out of all the financial issues faced during a divorce, the family home is the most emotional one. Many people really do not like the idea of having to sell or give up the family home. They have spent a great deal of time turning the house into a home. What tends to happen, since assets are usually divided equally, is that one of the spouses gives up other assets such as stocks, bonds etc., to keep the home.

Below are five different scenarios where a reverse mortgage might make sense for one or both spouses getting a divorce.

Giving Your Ex-Spouse Their Portion of Equity

This scenario really works best when the home is owned free and clear or if there is only a small balance left on the mortgage. With a reverse mortgage, the biggest determining factor on how much you can borrow is based on your age and current interest rates. The maximum value given to a home is $679,650. If you own a million-dollar home, the loan will still only be based on the maximum value of $679,650. You will be able to give your ex-spouse their portion of the equity, or most of it.

There are four reasons why you may want to consider utilizing a reverse mortgage in this situation. The first reason would be that you would be able to retain the home. The second reason would be that you can retain more of the “liquid” assets such as stocks, bonds and savings since you would be giving your spouse their share of equity. You may not be able to qualify for a traditional mortgage or a home equity line of credit with your current income. And finally, there would be no monthly mortgage payments to worry about.

What both you and your spouse need to understand is that they may not receive all their equity within the first year. This is because FHA implemented a guideline that limits the amount of cash out during the first year.

Here is an example of that:

Let’s assume that based on your age and current interest rates, you would be able to borrow $130,000 of the equity in your home. However, only 60% of the $130,000 is available the first year, or $78,000, less closing costs. The spouse would have to wait one year to receive the remaining amount owed to them.

Making the Home More Affordable

If you are awarded the home in the divorce and want to keep it, affordability may be an issue. You may not have enough income to cover the mortgage payment, plus your other debts and living expenses. Refinancing the home utilizing a reverse mortgage, you could pay off the balance of the mortgage, getting rid of the monthly mortgage payments. At that point, you would only be responsible for paying taxes, insurance, HOA fees (if applicable) and upkeep of the home.

There are three reasons to consider a reverse mortgage when there is a current balance on the mortgage, besides making the home affordable. First, if you sold the home, there may not be enough equity to purchase another home. Renting a home or apartment will probably be more expensive than paying taxes, insurance and other costs associated with keeping the home. Depending on the value and mortgage balance, you may be able to gain access to additional equity which you could use to supplement your income or retirement accounts.

Selling the Home and Buying Another

Using a reverse mortgage to purchase a home could mean a fresh start for both people in the recently ended relationship. This scenario is wholly dependent on the value of the home and the amount owed against the property.

To simplify this scenario, we are going to assume the home is worth $300,000 and is owned free and clear and there are no liens against the property. We are also assuming the home sells for what it is worth. Based on those numbers, each spouse could expect approximately $140,000 in proceeds from the sale of the home. I say approximately, because it will depend on what the real estate agent is charging you to sell the home, closing costs from the title and escrow company and if there were any concessions such as paying for a portion, or all of the buyer’s closing costs.

Assuming each spouse walked away from the sale with $140,000, they could each purchase a $230,000 house, or more, depending on their age and current interest rate. This could allow each spouse a fresh start in a new home, and there are no monthly mortgage payments. If you are the spouse that is required to pay alimony, this makes alimony payments much more affordable.

Using the Home to Increase Cash Flow

The most common result I see in a divorce is where one spouse keeps the house and the other keeps the liquid assets. In every one of these situations I am working with the spouse that kept the house.

Through the utilization of the reverse mortgage, cash flow can be increased in several different ways depending on the situation.

If the home has a mortgage, the reverse could be used to refinance and payoff that loan and get rid of the monthly mortgage payment. This could free up hundreds, even thousands of dollars every month.

If the home is owned free and clear or has a significant amount of equity, that equity could be turned into monthly payments for as long as they live in the home, or for a specified term.

Cash Reserves

If the spouse that kept the home gave up access to savings or other liquid assets such as stocks and bonds, then they may want to consider setting up a line of credit. The line of credit can create liquidity in the home should the spouse need additional income if unexpected expenses arise.

The line of credit can reduce anxiety and fear if they do not have other liquid assets from which to pull from. It can become an insurance policy should problems ever arise.

A reverse mortgage can take the financial sting out of the divorce. It can provide a more stable and less financially troubling retirement. It is something that virtually every divorcing senior couple that owns a home should consider.