How to use a Reverse Mortgage in a Divorce Settlement
Michael G. Branson, CEO of All Reverse Mortgage, Inc., and moderator of ARLO™, has 45 years of experience in the mortgage banking industry. He has devoted the past 19 years to reverse mortgages exclusively. (License: NMLS# 14040) |
All Reverse Mortgage's editing process includes rigorous fact-checking led by industry experts to ensure all content is accurate and current. This article has been reviewed, edited, and fact-checked by Cliff Auerswald, President and co-creator of ARLO™. (License: NMLS# 14041) |
You may have heard about how a reverse mortgage can help improve your financial situation by allowing you to withdraw the equity in your home over time.
For those people meeting the 62-year-old age requirement who have substantial home equity, this can be a means to expand monthly cash flow or eliminate mortgage payments by paying off an existing mortgage through a federally insured loan.
But there’s another, less commonly known benefit of reverse mortgages: their utility in divorce situations. A reverse mortgage can offer a financial lifeline during the often complex process of dividing assets.
It can ease the burden on both parties, providing a means to equitably split home equity and facilitate independent living arrangements. This financial tool can be a valuable asset in ensuring both parties navigate the financial aspects of a divorce with greater ease and security.
Reverse mortgages and living separately.
Many couples who separate later in life find themselves unable to support the costs of a home once supported by two partners now that they are independently responsible.
Here is where a reverse mortgage can come into play…
The loan allows you to choose how you withdraw the equity in the home, whether as a lump sum, a series of ongoing payments, or a combination of one spouse prefers to remain in the house but cannot meet the monthly mortgage payments, a reverse mortgage can be used to pay off the mortgage, with any remaining proceeds going to the moving spouse.
For example:
Say you have a $300,000 home with an $80,000 mortgage balance at age 72. You can borrow a little more than $200,000, with $80,000 going to pay off the existing mortgage and the remaining $120,000 to be used however you choose. You can even wire the funds to the moving spouse at closing. You must remove the moving spouse from the home title, which can take place during the loan.
As with any reverse mortgage, the loan becomes due when the borrower moves from the home or passes away. They must continue to pay property taxes and homeowners insurance over the life of the loan. This will allow one spouse to keep the home payment free while the other can save the remaining cash.
Exploring the Reverse Mortgage for Purchase Option During Divorce
Amidst a divorce, a ‘Reverse Mortgage for Purchase‘ can be a strategic financial tool if neither spouse wants to stay in the family home. This innovative option combines the purchase of a new home with the benefits of a reverse mortgage, all in one transaction.
This approach can be particularly advantageous for a divorcing couple. It enables one spouse to seamlessly transition to a new residence using a reverse mortgage, while the other may receive a portion of the cash proceeds. This solution is especially fitting for those considering downsizing.
Leveraging a reverse mortgage for purchase can simplify the property division process in a divorce, ensuring both parties can move forward with their new living arrangements and financial independence.
If you get divorced and already have a reverse mortgage
When a couple with a reverse mortgage together decides to get a divorce, they must submit the divorce decree to the loan servicer. At that point, one of the spouses will be permitted to be removed from the home title, keeping the loan in the remaining spouse’s name.
Managing a Reverse Mortgage During a Divorce
For couples who are undergoing a divorce and already have a reverse mortgage, it’s important to understand the necessary steps to manage this financial arrangement. Upon deciding to divorce, the couple must provide their divorce decree to their reverse mortgage loan servicer. This is a key step.
Following this, the process allows for one spouse to be officially removed from the home’s title. Consequently, the reverse mortgage loan will then be solely in the name of the remaining spouse. This procedure ensures that the reverse mortgage terms are appropriately adjusted to reflect the new ownership status, providing a clear path forward for both parties in managing their joint financial commitments post-divorce.
Options for Dividing Home Equity in Divorce: Selling, Refinancing or Reverse Mortgage
Option | Description | Pros | Cons | Key Considerations |
---|---|---|---|---|
Selling the Property | Selling the home and dividing the proceeds. | Clear and immediate division of assets; liquidation of equity. | Both parties must relocate; dependent on market conditions. | Timing, market conditions, and potential capital gains taxes. |
Refinancing | Obtaining a new mortgage to pay out the spouse’s share. | Retain ownership of the home | Qualification for a new mortgage required; potential closing costs and higher mortgage payments. | Credit score, income stability, and ability to manage increased mortgage debt. |
Reverse Mortgage | Taking out a reverse mortgage to pay the spouse’s share of asset. | No monthly payments required; allows one spouse to remain in the home. | Depending on the occupying spouse age, may not qualify for full 50% loan-to-value to split asset evenly. | Age requirements (usually 62+); suitability for the remaining spouse's long-term financial plan. |
Top FAQs
What happens to a reverse mortgage in a divorce?
Can a reverse mortgage be taken to fund/settle the divorce payout?
How does my existing reverse mortgage affect my new spouse?
Will a divorce cause my reverse mortgage loan to be called due and payable?
If I divorce, can I get a new reverse mortgage of my own?
If you are co-borrowers and separate, and one buys a new house, does the reverse mortgage become due if the other stays in the reverse house?
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