It’s fairly common for divorcing spouses to have to decide what they’re going to do with the primary residence. Often times, an emotional decision is made to transfer the house to one person’s name. Under those circumstances, it’s fairly common that little thought is given to how that person is going to afford the home. Although the parties may figure a way for one spouse to keep the house, this decision usually compromises the homeowners remaining financial situation. Here are a few scenarios (some better than others) of how older folks can circumnavigate this problem.
Scenario #1:
Rhonda, age 64, was awarded the family home in the divorce. She loved her home and wanted to stay in it, but the house was large and needed repairs. She was concerned about her cash flow and her ability to make the $2,700 mortgage payment. Ultimately she realized she needed to downsize to a smaller home. After selling the family home, she netted $245,000.
She purchased a townhouse for $245,000 with a $70,000 down payment. Her new monthly payments were $1,200 per month, less than half her previous mortgage payments. Although a huge savings, she still needed to live off the remaining $175,000 (from the sale of the home), but based on her annual living expenditures, it was projected to be gone in about 7 years.
Scenario #2:
Liz, age 64, was awarded the family home and really wanted to stay put. With a mortgage payment of $2,700 per month, she was very concerned about her cash flow and her ability to make the mortgage payments. Liz chose to engage in an immediate reverse mortgage, which enabled her to stay in her home, while not having a mortgage payment moving forward. By saving $2,700 per month, Liz was able to maintain a similar lifestyle without having to dig into savings.
Scenario #3:
Jill, age 64, was awarded the family home with a monthly mortgage payment of $2,700. She decided she wanted a smaller place, so she sold the home. Because she owned the home outright, Jill netted $360,000 from the sale. She turned around and bought a $245,000 townhouse using an immediate reverse mortgage, with an $115,000 down payment. Under this scenario, Jill never had to make another mortgage payment and had the remainder of her money ($245,000) to invest.
Facts about reverse mortgages:
- The owner (and spouse) must be at least 62 years of age.
- It must be their primary residence.
- There are no credit or income requirements to qualify for a reverse mortgage.
- The buyer still owns the house.
- The house may be sold at any time.
- The interest on the loan is added to the mortgage balance.
- When the house is sold, if the mortgage balance is higher than the value of the house, the owner has no liability to make up the difference.
Reverse mortgages are certainly not the only strategy to consider when deciding how to separate (and thus afford) the primary residence during a divorce. However, they can be used creatively to allow parties to stay in their home (and afford it), or to move to a new residence without compromising their remaining financial situation.