Syndicated radio and television financial pundit Dave Ramsey has attracted a large audience with his no-holds-bar blunt advice for Americans struggling with debt or seeking financial guidance. While Ramsey may be adequately knowledgeable about many topics, most notably debt management, recent comments reveal that he remains woefully ignorant about reverse mortgages.
A baseless accusation
In a recent column by The Street Ramsey boldly asserts, “Reverse mortgages sound like a good plan — after all, who wouldn’t want a dream retirement funded entirely by their house! But here’s the truth: Reverse mortgages are major rip-offs”. As per previously baseless accusations against the loan Ramsey conveniently never specifies how a reverse mortgage is a bad deal only focusing on the loan’s upfront costs.
Ironically Ramsey notes, “Homeowners who take out a reverse mortgage put up their house as collateral for the loan — that means you lose your house if you don’t live up to the terms of the loan”. Well, that’s precisely what you have with a traditional mortgage! So are 15 or 30-year mortgages scams as well, Mr. Ramsey?
It’s not the interest rates
“Reverse mortgages are especially risky for seniors because they carry high interest rates. Accruing debt could easily lead to defaulting on the loan and house foreclosure”. Again, a simple Google search would save Mr. Ramsey and Ramsey Solutions the embarrassment of spreading false information- a bad look for any company whose reputation hinges on the financial advice given to listeners and viewers. Also, what’s typically risky and conveniently not mentioned is that for older homeowners with a fixed income, the burden of a monthly mortgage payment is a clear and present risk.
The truth is the rates for today’s Home Equity Conversion Mortgage (HECM) or federally-insured reverse mortgage are quite similar to traditional mortgages. The issue isn’t the interest rate, but that most borrowers do not make optional principal and interest payments. This means the accrued interest and FHA mortgage insurance premium are added to the previous month’s balance negatively amortizing over the life of the loan therefore increasing the ultimate amount due.
What Ramsey and others also fail to mention is that a home with or without a mortgage or reverse mortgage for that matter appreciates just the same as any other. Reverse mortgage borrowers who didn’t take out all the proceeds could have a significant amount of remaining equity at the end of the loan which can be passed onto the homeowner’s children or heirs.
For example, a couple with a $700,000 home gets a reverse mortgage to pay off their existing mortgage balance and eliminate their required monthly principal and interest payments of $1,800. Their starting balance (UPB: Unpaid Principle Balance) including financed fees and the mortgage payoff totals $200,000. If their monthly interest rate averaged 7 percent and you add another half-percent for the required FHA insurance premium their loan balance would be approximately $892,163 in 20 years. However, if their home appreciated by an average of three percent annually the home would be worth roughly $1.2 million leaving over $372,000 in remaining equity. Even better, the homeowners increased their monthly cash flow by $1,800 retaining $21,600 in cash each year and $432,000 in 20 years. .
Final observations
It’s unfortunate but not surprising to see pundits like Ramsey and others continue to disparage a loan that could have brought financial relief to older homeowners who were cash-constrained or sought to leverage their home’s value without required loan payments. “It seems nobody wants a reverse mortgage, but everyone wants what the reverse mortgage does for them. Clearly there is a disconnect between the product and what people think about the product”, said industry author and expert Dan Hultquist.
True. That disconnect will continue as long as financial pundits and commentators place high theatre and entertainment over providing their audience with accurate and responsible information.
10 Comments
Well I don’t follow Dave Ramsey but i’m guessing he sells annuities in one of his companies. What is the upfront cost on those and what is the upfront cost to the borrower?
Perhaps dave would be all in on those jewels.
I am sorry but is there a borrower on an annuity? Are you suggesting that Dave promotes the idea that reverse mortgage proceeds be used to buy his alleged sponsored annuities which I greatly doubt. By what you write do you understand annuities? It seems not.
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Clearly Ramsey does not know what he is talking about here. However in the same way a broken clock is right twice a day he has one thing right. The upfront costs are too high and that is the initial mortgage insurance premium. Hud must reduce that . The other thing that should be changed is the principal limit percentages. They are way too conservative.
OMG! Will he ever stop or is he just having some marketing company repost his OLD scripts! Let’s invite him to the NRMLA Convention this year! Everyone onboard?? 😲🙋♀️
Right?!
that would be awesome
I thought at one time a major sponsor of Dave Ramsey was a mortgage company out of Seattle, “Church” mortgage or something like that and that company had a major Reverse Mortgage producer. I remember when Dave Ramsey told people to rent until such time they could pay cash for a house. That idiotic approach changed when he became a mortgage LO getting referrals from his sponsor.
I agree that the FHA Reverse Mortgage program is a ripoff, but for different reasons.
First, the obvious growth in the Reverse Mortgage insurance fund since 2017 shows that the mortgage insurance premiums are much too high.
Second, the greatest risk to the insurance fund is not borrower actions but actions of the federal government. FHA has no plan to deal with borrowers who are unable to handle their affairs at the end of the loan. FHA expects dead people to sell the home, pay off the loan, and walk away with cash. FHA expects people moving to memory care to do the same. FHA expects people with $400/month of Social Security income to pay lawyers or fiduciaries to handle these items. Yes, I have closed a HECM for a lady with $400/month of Social Security income. FHA’s servicers do not adhere to recommendations to prevent seniors from being scammed. I could keep going, but the short story is that the people at FHA that are age 22-62, do not truly understand what it’s like to be age 62 -102. FHA has no consideration for people dealing with vision loss, hearing loss, dementia, and other issues that are more common as we age.
It’s easy to disparage a product that is positively life changing for seniors when you are too young and too wealthy to understand what these people are going through. My book, “Why a Reverse Mortgage?”, tells a few of these stories. I have many more, including stories I have not told of people who got into worse situations by using other government programs to avoid a HECM. If people are going to comment, they should also understand the bad things that can happen to people that don’t get a HECM. It’s easy to paint a bad story with only part of the picture.
He and Suze Orman love to bash reverse mortgages and both give false information which is completely misleading to the consumer.
Agreed.