The biggest financial asset most elderly people have is their home. And now, because of reverse mortgages, it is easier to lose them.
A reverse mortgage is a type of loan that allows homeowners 62 and older to borrow against the equity they have accrued in their homes. The loan lets homeowners access the equity in their home without having to sell the home. Reverse mortgages can help seniors stay in their homes while getting access for the money they need in retirement.
It is called "reverse" because, instead of making payments to the lender, the homeowner instead receives money from the lender. The money you receive, and the interest charged on the loan, increases the balance of your loan each month. Eventually, the equity in your home decreases as the amount you owe increases. The loans must be repaid when the borrower sells the home, moves out or dies.
So what's the problem?
Several widows across the country say they are facing foreclosure and eviction following their spouse's death because their names weren't included on the reverse mortgage deed. The widows say they have no claims to live in the home unless they purchase it directly following their spouse's death.
Consider the case of Joan Serioux-Forde, 72, as reported recently by The New York Times. Her husband, Christopher, died last year. Roughly a month after the funeral, she received a letter from Generation Mortgage, a reverse-mortgage lender, informing her that unless she paid $293,000, she would lose her home in San Bernardino, Calif.
Ms. Forde said she was never informed that if she wasn't on the reverse mortgage deed, she would have virtually no right to stay in her home unless she bought it outright.
"It's a nightmare," she said. Generation Mortgage declined to comment to the Times.
The number of reverse mortgages has declined recently, peaking at about 115,000 in 2007, before the financial crash, to 51,000 loans last year.
But defaults are at a record high — almost 10 percent of all loans. And borrowers "are putting their nest eggs at risk by increasingly taking out the loans at younger ages and in lump sums," the Times reported.
That is why it is important that you go through counseling before obtaining a reverse mortgage.
Some reverse mortgages are federally insured. If so, they are called Home Equity Conversion Mortgages (also known as HECMs). If you are interested in a federally insured reverse mortgage, you must first see a counselor.
Also, when considering a reverse mortgage, borrowers need to be sure they will have enough money to pay real-estate taxes and homeowners insurance, or otherwise face eviction. It is also very important for married couples to be sure to have both names listed on the mortgage to avoid the surviving spouse from having to pay off the loan. And retirees should be wary of brokers pushing higher-fee reverse mortgages.
Reverse mortgages are very complex to understand, so if you don't understand the cost or features of a reverse mortgage or any other product or if you feel pressured to complete the deal, walk away.