Divorce attorneys, financial planners, and registered investment advisors are beginning to recognize reverse mortgages as an innovative financial planning tool for senior homeowners.
Divorce rates among seniors, dubbed “gray divorce”, are on the rise according to a new article from the Pew Research Center, Led by Baby Boomers, Divorce Rates Climb for America’s 50+ Population. In addition to the increasing numbers, author Renee Stepler concludes that divorce at this stage of life has added complications. So-called gray divorcees tend to be less financially secure than married and widowed counterparts, particularly among women.
Beyond the emotional turmoil, the financial considerations of separate living arrangements present significant challenges. If a jointly-owned home is involved, especially if a mortgage is owed, settlement options are more difficult and strained unless both parties agree to sell and divide the proceeds. If there is not enough money for one party to buy the other out, the choices are limited and typically include cash-out refinancing with increased monthly payments, or some other deferred arrangement that may not be optimal for either party.
The FHA-insured Home Equity Conversion Mortgage (HECM) reverse mortgage offers some distinctive and valuable alternatives. An overlooked resource, the HECM is largely misunderstood by consumers and professional advisors to be loans of last resort most suited for seniors in dire need.
This misunderstanding is especially unfortunate in the planning of divorce or separation agreements for homeowners 62 or older. HECMs include some unique provisions that may provide better arrangements for both parties where: (1) one party wants to keep the marital home and acquire the interests of the other, and (2) the other party needs payment to move on, or purchase a new home. Consider the following example:
John (68) and Mary (66) jointly owned their home in Hingham, Mass. valued at $500,000 with a $95,000 mortgage balance owed. A divorce ensued. Mary wanted to keep the home for herself and the children by acquiring John’s equitable interest. John agreed, but needed funds from his share of the home’s equity to relocate and purchase a condominium.
Mary refinanced the Hingham home with a HECM reverse mortgage that: (1) paid off the $95,000 mortgage and loan costs of approximately $11,000; (2) provided $168,000 additional proceeds to fund the buyout arrangement with John; (3) acquired the full title to the home without incurring any obligation to make future mortgage payments; and, (4) enabled her to live in the home indefinitely as long as she keeps the loan in good standing. Good standing includes keeping real estate taxes and homeowner insurance current, maintaining the property, and living in the home as her primary residence. These are her only obligations going forward.
John benefited from: (1) being removed from liability of the $95,000 Hingham mortgage; and (2) receiving funds that enable him to relocate and purchase the condominium. Additionally, John was able to finance the acquisition of the new condominium with a HECM Reverse Mortgage for Purchase. This enabled him to: (1) complete the purchase with a 50% down payment, financing the 50% balance with the reverse mortgage; and (2) acquire ownership in his name and live in the new unit indefinitelywithout any requirement to make monthly mortgage payments. HECM mortgage payments are optional, and can be made in any amount when desired without a pre-payment penalty. His only responsibilities include keeping the homeowner association obligations and real estate taxes current, and continue living in the unit as his primary residence.
While divorce or separation is difficult at any age, the rate among seniors is on the rise, adding new burdens and complications at a most vulnerable time in life. Clearly, financial considerations are at the forefront with options constrained by the realities of limited retirement income, liquidity and other restrictions.
The HECM reverse mortgage was designed to meet the special needs of senior homeowners who want to remain in their home and achieve greater long-term financial security. It should also be a fundamental consideration when divorce or separation arrangements are being considered. In short, the HECM reverse mortgage enables housing wealth to combine with financial wealth to achieve greater results.
In any event, senior homeowners 62 and older should learn about and understand the HECM program facts, and not be misguided by common misconceptions. This program was developed by HUD and insured by FHA to enhance seniors’ financial security and facilitate their ability to age in place. For many, the versatile provisions of HECMs open the door to new possibilities. For separating seniors, it may be a game-changer.