In the 21st century, the face of divorce is changing. So too are the strategies we as financial advisers must employ to help our clients prepare for the future.
While divorce rates overall are down nationwide, the frequency of divorce in older couples, those in their 60s and up, have been increasing in the last few years. This rise in so-called “grey divorces” presents specific challenges and needs unique to the age group, and requires new methods of planning on our part. Naturally, there are commonalities across all age groups, but women who are divorcing after decades-long marriages often are confronted with specific financial concerns which are absent or less important for their younger counterparts.
Fortunately for these clients, they also typically have access to financial products unavailable to someone much younger.
One of the most useful and powerful of these is the reverse mortgage.
In the first decade of this century, reverse mortgages got a black eye as a number of disreputable scammers talked elderly individuals into choosing one when it was not in their best interest, usually resulting in vastly increased debt or even loss of the home. However, since 2013 the lending industry has created new government-insured products to lower borrowing costs and reduce the potential for unethical practices. Now, the overwhelming majority of reverse mortgages in the United States are Home Equity Conversion Mortgages (HECM), overseen by the Department of Housing and Urban Development. In recent years, the federal government has refined HECM regulations to enhance the reliability of the underlying mortgage insurance fund and to make certain borrowers have the financial resources they will need to meet their obligations. Under these new guidelines, reverse mortgages dropped to about 30,000 in 2016, a steep decline from the 115,000 in 2009.
A reverse mortgage is essentially exactly what it sounds like – instead of making monthly payments to a lender, the homeowner actually receives monthly payments based on the equity they own in the home. Alternatively, the homeowner may choose to receive a lump sum payment or even maintain a line of credit. This obviously increases the amount owed by the homeowner, and the loan comes due when the owner passes away, sells the home or if property taxes and insurance premiums are not paid. Due to recent enhancements in the HUD guidelines, in the case of the owner’s death the heirs will receive a cash settlement if equity is left in the home, but are likewise NOT liable for any negative equity. In short, HUD absorbs that loss.
Reverse mortgages are only available to people 62 years of age or older. They must also have an eligible home with no additional debt on the home.
So, what makes this such a powerful tool for a “grey divorce” client?
To begin with, there’s no restriction on the use of the funds from a reverse mortgage. In the context of a divorce, a reverse mortgage is an excellent way to “buy out” the other partner’s interest in the home. The funds can also be used for anything from basic home maintenance to coping with medical bills.
For example, Dick and Jane Smith are getting a divorce. They are the free and clear owners of a home valued at $500,000 and, as part of the divorce agreement, have decided Jane will keep the home. Jane applies for a reverse mortgage and receives a gross loan amount (before closing costs) of 55%. She can pay Dick the $250,000 that constitutes his share of the home and becomes the sole owner.
In the case of a client who has already gone through a divorce, a reverse mortgage can provide a way to stretch out the person’s settlement. It can provide a steady source of cash income during retirement, offsetting any need to liquidate investments and providing a means to cover any regular or unexpected expenses in the case of a down market. It can even have benefits at tax time and in determining Social Security income. Clients can limit their income tax exposure by using payments from a reverse mortgage to cover living expenses instead of making taxable withdrawals from a retirement investment vehicle such as a 401(k). Further, if you postpone taking Social Security payments and instead use your reverse mortgage as a source of income, you will increase the value of the monthly payments when you do begin to draw on your Social Security.
Each of these benefits can provide useful tools for older adults going through or who have gone through a divorce, but the combination of these factors makes the reverse mortgage a very valuable part of a post-divorce financial strategy.
This article was contributed to the First Quarter 2017 newsletter for The Family Law Section of the Dallas Bar Association.
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