Reverse mortgages, or plans that allow seniors (age 62 or older) to essentially sell off equity in their homes while still having full residence. These mortgages are often viewed as scams as they pay an average of less than fifty percent of the value of the equity and incur incredibly high startup fees and interest rates.
It just so happens, though, that these views may be more unfounded than previously believed. The government is billions of dollars in the negative on their offered reverse mortgage programs, so they are planning on introducing a whole host of new reductions and changes to their current setup to avoid losing even more money. Exactly what changes are they planning on enacting?
The primary change that is proposed will allow seniors to utilize a smaller portion of the equity in their home, so you will make less money in the long run while still giving them the same amount of equity. For some people, this will be somewhat insignificant, however for others it has the potential to be a deal-breaker.
What do you need to do to make sure you are in the former group? First and foremost, never base your retirement plan entirely around a reverse mortgage. It is smart to pay for many of your bills and even your existing home loans with the proceeds you receive from a reverse mortgage. It is not smart, though, to get in a situation where you are relying on the next check you will receive from your reverse mortgage. Reverse mortgages should be components of a well-rounded retirement plan, not a retirement plan on their own.
Another key change that the government plans to enact has to do with the interest and upfront fees in comparison to the equity payout. Currently, there are many options for how much you can pay in upfront fees and interest. Generally, the higher your fees and interest rates are, the more you will receive in payout in the long term. While this makes it difficult for those who do not have as much money to spend upfront, it allows for a custom plan to fit your needs more exactly.
Now, the government is essentially doing away with the programs that have higher fees and higher payout. They are limiting your options to plans with little in upfront fees and low interest rates but much lower payouts. This is done as these programs are much less expensive and much lower risk to the government. If the owner dies in the middle of the loan, the government is out much less money. Take this into account when planning on a reverse mortgage in the future and make sure to always read the fine print.