January 3, 2009
Reverse Mortgage – Disclaim Spouse at Younger Spouse’s Peril
Reverse mortgage lenders lend to borrowers on three criteria; value of the home, age, and interest rates. The older the borrower, the more a lender will lend to that person as a ratio of the value of the home.
Supposing there is more than one person on the loan. The lender factors the youngest persons age as the determinant in the equation to find the loan amount.
This makes sense from a lenders point of view. After all, the mortgage doesnt end until the last surviving spouse either kicks the bucket or sells the house. From a lenders point of view the mortgage cant exceed value or the lender loses money.
With that in mind the lender must give the younger borrowers a lower loan to value ratio than the older ones. The young ones will be in the home longer, and the lender must account for the power of compounding interest working against the security for their investment.
Where a problem rears its head is when husband and wife are getting a reverse mortgage and in need a large cash out figure. That figure may exceed that which the younger spouse qualifies to get, but is within reach of the older spouse.
How some people get around this is by disclaiming the younger spouse from the note and deed of trust. They can now cash out at the larger sum.
Theyve accomplished the goal! Yeah!
But not so fast, there are problems in doing this. Sometimes in the busy scheme of things, we forget that we will not be here forever! Yes, we too will pass.
After the bank finds out of the older borrowers passing (and they will), the remaining borrower will be notified and has roughly a year to compensate the bank.
Since reverse mortgages are generally used on a I need the money because I need the money basis, chances are the surviving spouse will need to sell the home at that point.
The important thing to think through is that many people have long emotional ties to their home. My suggestion is to be sure the financial obstacle you wish to overcome with a reverse mortgage, by disclaiming the spouse, is worth the emotional heartache of losing the home too.
Removing the younger borrower from the note should be done only if necessary, and if both parties have full comprehension of future consequences.
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