In this blog, we will explore why Dave Ramsey is completely wrong about reverse mortgages by going through his extensive false claims and debunking each one.
Dave Ramsey is Totally Wrong about Leverage
Dave Ramsey’s stance against using leverage and debt is in direct opposition to the potential benefits of utilizing home equity through a reverse mortgage.
While many people may be over-leveraged with credit card debt, it is important to understand that not all debt is created equal. In fact, the CFOs of every Fortune 500 company understand the value of leverage.
Even Dave Ramsey, who is a paid lead provider for Churchill Mortgage, a well-respected mortgage firm, recognizes that there is such a thing as “good debt” that can be properly used.
The proper use of home equity through a reverse mortgage can allow retired homeowners to eliminate debt, withstand financial shocks on a fixed income, and even decrease their tax liability. It can also increase overall net worth and leave a larger legacy for the next generation.
Unfortunately, some of Ramsey’s followers are so afraid of using the most powerful lever they own (home equity) that they may never fully realize these benefits.
Claim #1 - “Over 100,000 reverse mortgages have failed, resulting in foreclosures and evictions”
Dave's claim that "Over 100,000 reverse mortgages have failed, resulting in foreclosures and evictions" is inaccurate.
While there were around 100,000 foreclosures involving homeowners with reverse mortgages after the housing meltdown 12 years ago, these foreclosures were not due to failures of the reverse mortgage itself.
Most of the foreclosures occurred from 2008-2012 and were either "beneficial" or "neutral" from the borrower's perspective.
In "beneficial" foreclosures, the amount borrowed exceeded the value of the home after the death of the last borrower, and the lender foreclosed on the vacant property to sell it at a loss.
In "neutral" foreclosures, the foreclosure was due to property tax default, which can happen regardless of whether the borrower has a reverse mortgage or not.
Reverse mortgages do not make borrowers more likely to default on their tax bill since they eliminate the required mortgage payment and provide the borrower with cash.
Claim #2 - “If you die before you’ve sold your home, those you leave behind are stuck with two options. They can either pay off the full reverse mortgage and all the interest that’s piled up over the years, or surrender your house to the bank.”
The statement, "If you die before you've sold your home, those you leave behind are stuck with two options.
They can either pay off the full reverse mortgage and all the interest that’s piled up over the years, or surrender your house to the bank" is incorrect and is meant to instill fear regarding reverse mortgages.
The US Department of Housing and Urban Development (HUD) and The Federal Housing Administration (FHA) regulate and insure the Home Equity Conversion Mortgage (HECM) product, respectively, and allow heirs up to 12 months to sell the home after the borrower's death.
Selling the home provides a form of inheritance for the heirs and is a common and favorable option.
Additionally, most heirs are content to sell the home and receive the remaining equity, and they may fail to recognize that without the reverse mortgage, they would have been responsible for the costs of aging.
If the heirs sell the home, even if it is underwater, they may have the potential for a tax deduction, but this is a separate topic.
Claim #3 - “…you won’t qualify for a reverse mortgage if your home is worth more than a certain amount.”
The claim that "you won't qualify for a reverse mortgage if your home is worth more than a certain amount" is false.
It demonstrates a lack of knowledge about the Home Equity Conversion Mortgage (HECM) product. HUD does set limits on the HECM product each year, and for 2021, the limit is $822,375.
However, if a borrower's home appraisal exceeds the HECM limit, it does not affect their ability to qualify for the product in any way.
The limit only restricts the home value when calculating the proceeds. For instance, if a borrower has a $1 million home and qualifies for proceeds of 60%, they will not receive $600,000 in principal.
Instead, they will be eligible for 60% of $822,375, or $493,425, which is the maximum initial principal limit for the product. Essentially, a borrower with a home value that exceeds $822,375 has merely maximized their initial principal limit.
More False Claims from Dave Ramsey about Reverse Mortgages
Here are even more false claims Dave Ramsey has made about reverse mortgages, showcasing a complete lack of understanding about the product.
“…you’ll pay a hefty mortgage insurance premium that protects the lender (not you) against any losses.”
Dave Ramsey’s claim that the mortgage insurance premium (MIP) of a reverse mortgage only benefits the lender is incorrect. In fact, the MIP protects both the borrower and the lender.
It is primarily designed to pay for losses resulting from the non-recourse nature of the reverse mortgage, which means that the borrower will never owe more than the value of the home.
This is a crucial protection for the borrower and their heirs, as it ensures that they will not be held liable for any shortfall in the event of a decline in the home’s value.
Furthermore, the MIP guarantees that the lender will be repaid even if the loan balance exceeds the value of the home at the time of repayment.
Without the MIP, lenders would be far less likely to offer reverse mortgages, as the non-recourse feature would create too much risk for them to bear.
It is important to note that the MIP is a one-time fee that is added to the loan balance, and it is based on a percentage of the home’s appraised value. While it may seem hefty, it is a small price to pay for the valuable protections it provides.
“You are also required to take a loan for the maximum amount you qualify for.”
The statement "You are also required to take a loan for the maximum amount you qualify for" is completely untrue.
In fact, it's prohibited by the Federal Government. HUD, the agency that oversees HECM loans, implemented a policy in 2013 called "initial disbursement limits" which restricts borrowers from taking all the loan proceeds upfront unless they need to use them to pay off a significant mortgage balance at closing.
This policy was put in place to protect borrowers from borrowing more than they need and potentially using the funds unwisely.
So, the borrower is free to choose the amount of money they want to take out, up to the maximum amount they qualify for, but they are not required to take out the entire amount.
The decision about how much to take out should be based on the borrower's financial goals and needs.
“The interest rates that they’re calculated at are horrendously bad.”
The claim that the interest rates on HECMs are "horrendously bad" is simply false. In fact, for most of the years since the HECM program began in 1988, HECM rates have been at or below conforming interest rates.
This means that HECM rates are often competitive with other mortgage products available in the market.
Additionally, it is important to note that the interest rate on a HECM can be either fixed or adjustable, allowing borrowers to choose an option that best fits their needs.
While it is true that interest rates can vary depending on market conditions and other factors, the notion that HECM interest rates are inherently bad is a misconception that does not reflect the reality of the program.
“Servicing fees. These are another monthly expense coming your way with a reverse mortgage.”
The claim that reverse mortgages come with servicing fees is false. Although HUD allows for servicing fees, these fees have not been seen in a HECM product in over 10 years.
It is important to note that the federally insured reverse mortgage product has been constantly improving with new consumer protections and long-term advantages for those who wish to age-in-place.
Therefore, it is advisable to conduct personal research before making any decisions about retirement cash flow. It is unwise to allow the opinions of radio personalities with minimal knowledge of the product to influence such decisions.
More Common Misconceptions about Reverse Mortgages
Next let's talk about even more common misconceptions about reverse mortgages that Dave Ramsey hasn’t gotten to talking about yet.
Reverse mortgages require homeowners to give up ownership of their home
One common misconception about reverse mortgages is that the lender takes ownership of the home. This is not true. The borrower retains full ownership of their home throughout the life of the reverse mortgage.
The lender only has a lien on the property, similar to a traditional mortgage, and the borrower is still responsible for paying property taxes and homeowners insurance.
When the borrower decides to sell their home or passes away, the loan is repaid through the sale of the home, with any remaining equity going to the borrower or their heirs.
It's important to understand that the borrower always remains the owner of their home with a reverse mortgage.
Reverse mortgages are only for desperate or financially unstable seniors
This is a common misconception about reverse mortgages. While reverse mortgages can certainly be helpful for seniors facing financial difficulties or struggling to make ends meet, they are not exclusively for this demographic.
In fact, many seniors who are financially stable and comfortable still choose to take out a reverse mortgage to access the equity in their home for a variety of reasons, such as funding travel or home improvements, supplementing retirement income, or paying for healthcare expenses.
Ultimately, reverse mortgages can be a useful tool for seniors of all financial situations, and should not be dismissed solely as a last resort option for desperate individuals.
It's important to carefully consider all aspects of a reverse mortgage and consult with a trusted financial advisor to determine if it's the right choice for your specific circumstances.
Reverse mortgages are high-interest loans with hidden fees
Reverse mortgages have interest rates that are similar to traditional mortgages and are often lower than credit card or other unsecured debt interest rates.
The fees associated with a reverse mortgage are typically similar to those of a traditional mortgage and are disclosed upfront. These fees include an origination fee, appraisal fee, and other third-party closing costs.
Some reverse mortgages may also have a mortgage insurance premium, but this is required by the government to protect both the borrower and the lender.
It's important to carefully review and compare the fees and interest rates of different reverse mortgage options to make an informed decision.
Reverse mortgages are only for low-income seniors who can't qualify for traditional loans
The truth is that there are no income requirements to qualify for a reverse mortgage. The amount of money you can borrow is determined by your age, the value of your home, and current interest rates.
In fact, many high net worth seniors choose to use reverse mortgages as a financial planning tool to supplement their retirement income, pay off debt, or even purchase a new home.
With a reverse mortgage, seniors can access the equity in their homes without having to sell or move, which can be a valuable option for those who want to age in place.
Reverse mortgages mean that the lender will eventually own the home
This is a common misconception about reverse mortgages, but it is false. The borrower remains the owner of the home as long as they meet the loan obligations such as paying property taxes, homeowner's insurance, and maintaining the property.
The lender does not take ownership of the home, and the borrower retains the right to sell the property or pass it on to their heirs. In fact, when the loan becomes due, the borrower or their heirs have the option to repay the loan balance and keep the home.
The lender only has a claim to the equity in the property, not the property itself. Therefore, it is incorrect to say that a reverse mortgage means the lender will eventually own the home.
Reverse mortgages are only for seniors who plan to stay in their home for the rest of their lives
This is a common misconception about reverse mortgages. While the initial purpose of a reverse mortgage is to help seniors age-in-place, there are options for those who may not want to stay in their home for the rest of their lives.
For example, some seniors may choose to sell their home and use the proceeds to pay off their reverse mortgage, or they may choose to move into a different residence and transfer the reverse mortgage to the new property.
Additionally, there are options for seniors who may need to move into a nursing home or assisted living facility, such as a "non-borrowing spouse" provision or the ability to pause payments on the reverse mortgage for up to 12 months.
Ultimately, a reverse mortgage can provide financial flexibility and security for seniors regardless of their plans for the future.
The Bottom Line
The Home Equity Conversion Mortgage (HECM), a federally insured reverse mortgage product, has been around for more than 30 years.
Despite being widely enjoyed by homeowners, author and radio personality Dave Ramsey, one of the most listened to financial gurus on the planet, has been a vocal critic of the product.
Ramsey’s continued misinformation and lack of knowledge about the product is hurting older Americans who would benefit from it.
Every reverse mortgage in America is “non-recourse,” meaning neither the borrower nor their estate will owe more than the home is worth at the time the mortgage is due, and the fundamental conflict between the reverse mortgage and Dave Ramsey is his overzealous hatred of debt.
Some Ramsey followers are so afraid of using the most powerful lever they own, home equity, that they may never be able to eliminate debt and withstand financial shocks on a fixed income.
Wealthier retirees will never discover the value of using reverse mortgage acquisition indebtedness to decrease their tax liability, avoid sequence returns risk, or create better Roth Conversions if they listen to Ramsey's rants.