The rate of divorces occurring in older individuals is rising rapidly. People are living longer, and sadly, marriages aren't necessarily lasting through the decades.
According to the Pew Research Institute, people over 65 are getting divorced at three times the rate of younger individuals, approximately 75 divorces for every 1000 couples married at that age.
Reverse mortgages allow a couple to split and use the equity in the house to pay the divorce settlement, and to keep the marital property. In a typical divorce, there are three options when dealing with the marital home: sell it, own it jointly, or buy the other one out. The first two options are usually unacceptable in "gray divorces" for many reasons.
First, what is a reverse mortgage? Well it's a type of home loan for older homeowners that requires no monthly mortgage payment. Borrowers are still responsible for taxes and homeowners insurance. Reverse mortgages allow elders over 62 to access the equity they have built up in their homes. They defer payment of the loan until they die, sell, or move out of the home.
Since they are not required to pay monthly mortgage payments, the interest is added to the loan balance each month. In good times, the loan will not reach the value of the house; in bad times, however, it may overtake the value. Usually there is a proviso that the borrower is generally not responsible to repay any additional loan balance above the property value.
The house is not just any asset; it's typically where the kids grew up, and a life was built and then broken.
A divorce proceeding for older individuals comes down to splitting the financial assets, because the children are usually older and there is no custody issue. Reverse mortgages are a very creative way of pulling out your equity and keeping the home. It helps one spouse buy the other out, and be able to buy a new property.
It should be noted that reverse mortgages have a bad reputation that is, to some extent, unfair. The reason for this reputation is people, lawyers, and bankers all seem to lack knowledge. A reverse mortgage does not negatively impact your credit. However, the mortgage is based both on the equity of the home and the borrowers' age. Older borrowers can get access to a larger amount of the equity; so it depends on who's staying and who's going from the marital house, and the desired amount that may be borrowed.
The loan allows for you to choose how you withdraw the equity in the home, whether as a lump sum, a series of ongoing payments, or a combination. If one spouse prefers to remain in the home, no monthly payments are required, but could be credited as payments by the other. There is no restriction on what you use the money for; it may be used to by the departing party to buy a new home.
It's important to note that HUD (U.S. Department of Housing and Urban Development) requires that you attend a reverse mortgage counseling meeting by an approved housing counseling agency prior to making an application. Counseling will help you to understand the costs and the different payments options available, and to assure that you are making an informed decision. This requirement is an attempt to protect against scams and undue influence by family members.
Reverse mortgages can only be used on primary residences; however, you are allowed to live elsewhere for less than six months of the year. Moreover, you are also allowed to own other properties. However, you are not allowed to rent out your primary residence or any part of it if there is a reverse mortgage in place. Reverse mortgages will become due, and payable, if the person who used the property as a primary residence is forced to move into a hospice, hospital or nursing home for 12 consecutive months.
Proceeds from the loan are not considered income, and accordingly, should not affect Medicare or Social Security. Consult with your accountant, or the counselor, before deciding on this program. Reverse mortgages should not be overlooked as a solution to a difficult situation.
Written by Allison Scollar
Allison Scollar is a real estate broker with Keller Williams in Tribeca, New York. Her custody battle broke ground in that it highlighted the court's antiquated approach in dealing with same-sex divorce and non-biological child custody.