A reverse mortgage is a special financial instrument that functions a lot like a mortgage only (obviously) in reverse. When a homeowner takes on a reverse mortgage, the homeowner gives the title to the financial institution. In exchange, the financial institution lets the homeowner live in the home until a certain event happens (usually the homeowner’s death) and promises to pay the homeowner a monthly payment until that event happens.
Financial institutions are happy to provide reverse mortgages to people who 1) have lots of equity in their homes and 2) are very old and, therefore, not likely to live very long.
Generally, at least one of the homeowners need to be 62 or older to apply for a reverse mortgage.
Homeowners are likely to be intrigued by reverse mortgages if 1) Their home is their biggest asset and 2) they need regular income.
In America, due to a lot of reasons, the equity in a marital home is often a back up savings plan. A 401k may not get funded every year and savings accounts may get depleted but the equity in the home almost always goes up if the mortgage is paid.
Divorces can be caused by extreme financial stress. If one party is constantly starting businesses, losing the businesses, gambling or overspending, the marital home becomes the only real savings.
Since the 2008 financial crisis, it’s been very difficult to cash out equity from a home. This has left many households “cash poor and house rich.”
Typically, during a divorce, a house must be sold to divide the equity in the property between the husband and wife. “The court may make such judgments affecting the marital property as may be just and may enforce such judgments by ordering a sale of marital property, with proceeds therefrom to be applied as determined by the court.” 750 ILCS 503(i)
Many people prefer to divide their assets approximately in half in lieu of a court ordered sale. For example, the wife may get the house while the husband gets the retirement accounts.
So, in lieu of selling the marital home and finding a new place to live, a party may keep the marital home but forgo other assets. Often this creates a situation where the party with the house does not have a lot of spending money. If you have a house that has significant equity, you can get a home equity line of credit (HELOC). But, when your credit is weak, because of a messy divorce and/or lack of income to qualify, home equity loans are not available. Plus, HELOCs need to paid back on a monthly basis, which may not be possible without a significant income.
In comparison to a HELOC, the qualifications to get a reverse mortgage are less stringent. A reverse mortgage may allow a divorcee the best of both worlds: a place to live and an income.
If the homeowner remains in the home until the homeowner passes away, the heirs to the home generally sell the house after probate. At the close of the sale of the house, the reverse mortgage balance needs to be paid. The heirs to the home keep the difference between the sale price and the reverse mortgage balance. If the heirs choose to keep the home, the heirs can pay the reverse mortgage balance with their own funds or apply for a traditional home refinance under their own names.
If there is an outstanding mortgage on the marital home you may still be eligible for a reverse mortgage. The reverse mortgage will always pay the balance of the pre-existing mortgage.
To recap, the benefits of a reverse mortgage are a payoff of outstanding mortgages and a monthly payment to the homeowner while they still live in their own home. These monthly payments can supplement social security or whatever assets the party has left post-divorce.
A reverser mortgage is still called a “mortgage” so it must be made clear: there are no monthly mortgage payments from the homeowner required with a reverse mortgage. It’s the exact opposite: the financial company pays you.
The downsides of a reverse mortgage are as follows:
There is an upfront FHA insurance fee which causes the closing costs of a reverse mortgage to be higher than traditional mortgages. The closing costs are factored into the loan, so there are no out-of-pocket costs but the closing costs subsequently reduce the monthly payment.
Reverse mortgage monthly payments to the homeowner may affect eligibility for Medicaid or SSI as those programs have income requirements.
If a non-borrowing resident lives in the house with the borrower (a new boyfriend or girlfriend, for example) and a “maturity event” occurs (usually your passing), this person will have no right to remain in the home after the maturity event. The reverse mortgage balance becomes due immediately when the borrower passes away.
If you’d like to learn more about how a reverse mortgage can become a component of your divorce settlement strategy contact my Chicago law office today to talk to an experienced divorce lawyer.