March 2019 - Lonich Patton Ehrlich Policastri

What is a reverse mortgage and why would I want it?

A reverse mortgage is a type of home loan which can be used for any purpose. Unlike a standard home loan where you make monthly payments, with a reverse mortgage, the lender makes payments to you.

A reverse mortgage provides a way to use the equity accumulated in your house without losing ownership of your house or increasing your monthly payments.

When Can I get a Reverse Mortgage?

To obtain a Reverse Mortgage, you must be at least 62 years of age and the house must be your primary home, where you live at least six months out of the year.

The amount of the Reverse Mortgage is affected by many factors, however generally the value of the Reverse Mortgage increase with your age and the value of your house.

How does a Reverse Mortgage Work?

There are two types of reverse mortgages available, Home Equity Conversion Mortgages (HECM) and proprietary reverse mortgage.

HECM are federally-insured, widely available and have no income requirements. Proprietary reverse mortgages are not federally-insured as they are borrowed through private lenders, however they allow for higher loan amounts. The choice of reverse mortgage that is best for you will depend on your circumstances and needs.

You as the homeowner get to choose how the reverse mortgage is received. The payments may be received monthly, lump sum, or as a credit line. Interest is only charged on the amount received and the interest is added to the loan balance. This means that you do not have to pay the interest up front. Additionally, as the payment from the reverse mortgage is a loan, it is not considered income and is not taxable.

Once you have received the payments, there are no restrictions on how the money may be used. The money can be used to supplement your income, pay debts, or even to buy a new home.

A reverse mortgage will continue until all borrowers permanently move out of the house, sell the house, or the last surviving borrower passes away. Once the reverse mortgage ends, the loan becomes due, which can be paid by the sale or refinance of the house.

Is There Any Cause for Concern with a Reverse Mortgage?

A reverse mortgage can provide invaluable assistance in retirement and is the one of the few ways to access the equity you have built up in your home without increasing your monthly payments. However, there are several things to be aware of and consider before you make the decision to get a reverse mortgage.

The first thing to be aware of is that reverse mortgages often have higher fees than standard mortgages. These fees are rolled into the reverse mortgage and will further reduce the amount of equity you have accumulated in your house.

Second, the loan amount becomes due when the house is sold. As the sale of a house may happen unexpectedly it is important to consider the likely hood of this happening and the impact the reverse mortgage will have on the sale.

A final consideration is the effect the reverse mortgage will have on your estate. As you continue to receive payments, the equity in your house is reduced which will affect the amount received by your heirs.

Is a Reverse Mortgage right for me?

A reverse mortgage is a financial tool available to those who understand how the loan works. When considering a reverse mortgage, it is important to understand as much as you can about the reverse mortgage process, and balance that with your needs.

If you are thinking about a reverse mortgage loan, please contact one of the experienced attorneys at Lonich Patton Ehrlich Policastri. We offer free half-hour consultations.

Please remember that each individual situation is unique, and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

Who or What are Moore and Marsden?

Moore and Marsden are two cases decided by the California Supreme Court and the California Appellate Court in 1980 and 1982 respectively. These cases dealt with the issue of how to determine the community property interest in a house.

Generally, a house purchased before marriage will be treated as the purchaser’s separate property. However, during marriage if the mortgage is paid with community funds a portion of the value of the house may become community property. Because California is a community property state, this means all community property is divided equally in a divorce.

When do I Use a Moore Marsden analysis?

The decisions of the Moore and Marsden cases are the basis for what is called the Moore Marsden analysis. The Moore Marsden analysis applies a formula to determine what portion of a house is community property due to mortgage payments made during marriage with community funds.

To apply the Moore Marsden analysis, you need to have two key factors. First, any mortgage payments made must be made with community funds. Second, these payments must include payment of the loan principal and not only interest.

How do I Apply a Moore Marsden Calculation?

If you meet the above two factors, you must compare the market value of your home at the time of your marriage and the market value at them time of your divorce proceedings to calculate the amount the house has increased in value during the marriage.

You then compare the amount principal paid during the marriage to the total purchase price of the house to calculate what percentage of the purchase price was paid during the marriage.

Next you take the percentage of the purchase price that was paid by the community and compare that to the amount your house has increased in value during marriage and add to it the amount of the principal paid by the community to calculate the total amount of the house that the community is entitled to.

Finally, in a divorce this amount is divided between the spouses because it is community property.

For example, if your house was worth $100,000 at the time of marriage and $200.000 at the time of divorce, then the house has increased in value by $100,000.

If you purchased the house for $50.000 and during your marriage paid off $10,000 of principal with community funds, then 20% was paid by the community.

Using the above examples, you take the percentage paid by the community, 20%, of the amount your house increased in value, $100,000, and add the amount of principal paid during the marriage, $10,000, which equals $30,000. This means that the community would be entitled to $30,000 of the $200,000 house.

This would mean that in the above example, each spouse would be entitled to $15,000 as community property is divided equally. The remainder of the house value and the balance due on the loan is kept by the spouse that purchased the house with separate funds before the marriage.

Is There Anything Else I Should be Aware of?

In a typical divorce, there are many additional factors that may be involved in the calculation. Refinancing and home improvements made with community funds both influence the calculation. Further, it may simply be difficult to agree on the required values of the home with your spouse.

Because of the complex nature of the Moore Marsden analysis, it is important to discuss your circumstances with a knowledgeable expert. If you own a home and are considering divorce, please contact one of the experienced attorneys at Lonich Patton Ehrlich Policastri.

Reverse Mortgages: How it Works

California Divorce: What is a Moore Marsden Analysis?

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