The disposition of the home in a marital dissolution will often trigger more emotional conflicts than any other marital asset. In addition, the home is usually the highest value asset making it hard to add to one spouses’ side of the ledger without tipping the scales in favor of the spouse retaining possession, sometimes referred to as the “in” spouse. The problem is how can the in-spouse compensate the “out” spouse in order to balance both sides of the ledger.
One way of addressing this issue is for the in-spouse to mortgage the home and pay the out-spouse sufficient cash to right the balance. This assumes that the borrower has a sufficient combination of income, assets and credit to qualify for the loan. Another solution, provided that the borrower is at least age 62, is to borrow by means of a Reverse Mortgage. In the case of a Reverse Mortgage there are no monthly principal and/or interest payments as is the case with conventional mortgages. The interest simply accumulates until the mortgage is called as described below.
Reverse Mortgages are designed to allow senior homeowners to borrow against the equity in their home and defer any principal and loan payments until one of three happenings –
sale of the home, moving out for more than a year or death. At the occurrence of any of these three happenings the mortgage is called and the accumulated principal and interest is due and payable. In the event of death and if the heirs wish to keep the home, they can refinance the home under their own credit. If the home is sold the lender receives their accumulated principal and interest and the remaining equity is distributed to the owners whether it be the original borrowing spouse or his or her heirs. Contrary to popular perceptions, the Reverse Mortgage lender does not take title to the home. The borrowing spouse retains title to the home at all times either outright or through a trust and can pass the property to their heirs as they would absent the Reverse Mortgage.
There is a financial assessment performed to determine if the senior will be able to pay property taxes, homeowners insurance, utilities and have a reasonable income to live on after the reverse mortgage is entered into. Depending upon the equity in the home, additional funds may be borrowed over and above the funds need to balance the marital ledger. These additional funds can be used for any purpose such as supplementing income, vacations, medical needs, home repairs and so forth.
The most used Reverse Mortgage program is the FHA insured HUD program named Home Equity Conversion Mortgage (HECM). In addition, there are currently two proprietary Jumbo programs for larger valued homes. Which program is right for a given situation is easily determined by the borrower and their advisors.