Many older couples are getting divorced today, and this often puts them at a financial disadvantage if they haven’t properly prepared. Some have chosen to use reverse mortgages to provide some added financial support during their golden years. However, it’s important to realize that these types of mortgages are not for everyone, and you should be careful before choosing this option.
What Is a Reverse Mortgage and Who Can Get One?
Reverse mortgages are also known as Home Equity Conversion Mortgages, and they differ substantially from a traditional mortgage that’s used to buy a home. It’s important to note that you will need to be at least 62 years old to qualify for a reverse mortgage.
When you have one of these loans, you will not have to make any loan payments on the property. Essentially, it’s like getting paid to stay in the home.
While this sounds great, there are some caveats to keep in mind. For example, the full balance of the mortgage is due and payable upon the death of the borrower, when they sell the home, or when they permanently move out of the home.
Money from the Reverse Mortgage
Borrowers can opt to get money from a reverse mortgage in several ways. One of the most common in a divorce is getting the money in a lump sum, and it’s the only option for loans that have a fixed rate. Divorcing couples tend to choose the lump sum and will then split the money. Keep in mind that at least one person will typically need to continue living in the house to get a reverse mortgage.
There are a few other ways that you could get money from these mortgages. You could receive equal monthly payments, as long as at last one borrower is still living in the home. There are sometimes options for term payments, lines of credit, and hybrid solutions that have monthly or term payments in addition to a line of credit.
Why Would Someone Get a Reverse Mortgage?
More and more seniors are getting divorced today. As mentioned, this tends to put people at great financial risk. They don’t have all of the securities and comforts they had before, and they often see getting a reverse mortgage as one of the only solutions available to them.
Those who have become used to sharing an income and who suddenly have no income may feel that they have no other choice. The couple might agree to get a reverse mortgage for the home to ensure they have some money available to help them get through their twilight years.
A reverse mortgage has the potential to help provide some added stability in the event of a divorce. However, that’s not to say that there aren’t problems that can crop up when using a reverse mortgage. It’s important to consider those dangers before making a decision.
The Dangers of Reverse Mortgages
If you are going to consider a reverse mortgage, you need to be sure that you understand the contract entirely. The best option is to have it read and reviewed by a professional who can explain any terms or conditions that may not be clear.
Always look for hidden costs and fees, so you know all of the costs involved. This includes the upfront costs, as well as costs that will be incurred over the life of the loan.
One of the other dangers is the temptation that can come from getting money from a reverse mortgage. Since you no longer have to pay monthly mortgage payments, and you have more money available—either through a lump sum or regular payments—it can be tempting to misspend the money.
The money is meant to help shore up any financial gaps and issues someone has, but it’s not always used that way. Having relatively easy access to a substantial amount of money could tempt some into using it for vacations, gambling, etc. While it might be fun for a while, the money will run out and they end up in a worse situation than they were in before.
There is also a danger associated with residency in the home. When you get one of these mortgages, the lender expects you to live in the home for the duration. However, what happens if you are hospitalized for several months and aren’t at home? While you might imagine that lenders would realize that your intention was to still be in the home, that’s not always the case.
There is a chance that the lender could call the loan, meaning that it comes due. They could foreclose on the property. The same thing would happen if you were to move into an assisted living facility, for example. If you aren’t living in the house, it has the be sold and the reverse mortgage then needs to be repaid.
As you can see, there are plenty of potential dangers that arise from these loans. However, those who need money after their divorce, and who believe they can handle the reverse mortgage may find that it’s the best—or only—solution available for them.
Selling the Home After Divorce Is Often a Better Option
In many cases, simply selling the property and dividing the profits between the spouses is a better solution. It might take a little longer, and you may not get as much, but it removes many of those other dangers. Of course, there is still the danger of overspending when you get money from the sale of the home.
Seniors who are getting divorced should pay close attention to their finances and should try to live within their means whether they get a reverse mortgage or not. This will often mean moving into a smaller place, such as a senior apartment complex, which typically has lower rental rates. Consulting with a financial expert that can help create a budget is often a good idea, whether you are a senior or not.