The plain and simple answer is a little bit, but not really. Dave Ramsey does a hit piece on reverse mortgages in which he does point out some of the less popular aspects of reverse mortgages, but he has no problems either exaggerating or just shows his ignorance about the product.
Is Dave Right About Reverse Mortgages?
Firstly, let’s give Dave his due when he tells the truth. He is right when he says a reverse mortgage operates in reverse of a standard or forward loan. Instead of a rising equity falling debt scenario, the reverse mortgage is a rising debt, falling equity loan.
But he uses an example where you put $100 in the bank, get $40 back and they take the interest from the $60.00 you have remaining in the bank and says no one would do this.
How Debt Works
What Dave doesn’t tell you is that all debt works in much the same way. You use a small amount of the funds and pay a lot more back in payments.
If you have a credit card, you buy something and then you make payments of $50.00 a month of which only $5.00 goes to paying off the amount you borrowed.
Look at the disclosures on the standard mortgages that go for 30 years on which you pay month after month. After 30 years you probably paid 2 ½ times more than you borrowed on those as well.
So yeah, Dave, people take that “deal” day in and day out when they want or need something and don’t have the cash to pay for it outright. I see ads for 30-year fixed rate loans with low down payments or even no down payments for veterans and think what happens when they have no equity AND they have been paying through the nose each month, so they have no cash either?
Dave, where are you getting your info?
Dave’s understanding of the rules of the HUD program are sadly mistaken in several areas. Dave thinks that homes worth more than $679,650 don’t qualify for a reverse mortgage which is false. Dave mistakes the HUD lending limit (which is now $726,525 for 2019) with a maximum your home can be worth.
You could always have a home valued higher than the limit and still get the loan, there were just no additional benefits for homes valued above the maximum limit.
Dave thinks you can’t owe any federal debts which is not accurate, but you may be required to pay them at closing in some cases. And Dave thinks heirs have two options when the borrowers pass, pay the loan off at the full amount or give the house to the lender.
This again is either false or misleading at best.
Heirs can choose several options. If you want to keep the home, you may pay off the amount owed, or 95% of the current appraised value, whichever is less.
This is usually achieved by a new refinance loan in the heirs’ name if they want to keep the home. If they do not want to keep the home and there is still equity in the property, they can sell the home and pocket the equity.
Or finally, if they do not want to sell the home because there is no equity remaining and do not wish to be involved in the property disposal, they can walk away and owe nothing – regardless of the value and loan balance.
Reverse Mortgages are Insured Unlike Bank HELOC’s
The loan is a non-recourse loan and the lender and HUD cannot look to any other assets of the borrower or the borrower’s estate for repayment of any shortfall.
This is covered by the insurance the borrower received with the loan – oh, that Dave said doesn’t cover the borrower but here we see that the borrower’s estate and heirs do receive a benefit from the insurance other than just the availability of the loan itself.
The insurance also guarantees that no matter what happens to lenders in the future, borrowers will always receive all funds due to them and the loan will never be closed as was the case with HELOC’s when banks decided they did not want the product as values dropped.
Dave talks about a reverse mortgage giving away your net worth and gives the example of the average net worth of the senior borrower being almost $203,000 but under $58,000 without home equity. And this is where we really encourage borrowers to talk to their financial advisors and their families to see what’s right for them.
If they can’t afford to stay in their home without help, perhaps the family can work their own “reverse mortgage” type arrangement to help the senior homeowner. But if it comes down to a reverse mortgage or a move, you must do all the math and consider the emotional aspects which Dave doesn’t even mention.
Reverse Mortgages Aren’t For Everyone – We Agree!
Because here are some things on which we agree with Dave, but we think he only shows one side of the coin in this part of his pitch. Reverse mortgages are not for all senior borrowers.
If you are not able to make payment of taxes, insurance and all other obligations even after you obtain your reverse mortgage, then it is not the right loan for you.
It is a default under the terms of the loan if you do not pay your taxes and insurance on time or if you let the property fall into serious disrepair so we advise borrowers to bring family members into the discussion and to be sure that this loan makes their finances secure enough to where payment of these obligations is never in question.
If you still cannot afford to live comfortably with all obligations after a reverse mortgage, you should consider other options.
Selling Your Home as Cheaper Alternative?
And yes, the loan with the insurance is not inexpensive. But neither is selling a house with 3 – 6% commissions. Rent in most areas of the country these days is not cheap either if you don’t have the income and credit to purchase again under Dave’s plan and you can’t pay cash!
With Dave’s own example: a $200,000 house with a 6% real estate commission ($12,000) miscellaneous closing costs ($2500) and moving expenses ($2500), you can easily “give away” (his words) $17,000 on the sale of and move from a $200,000 home and that doesn’t include any expenses at the new place, especially if you are buying there!
We realize that this loan is not a multi-generational loan. If you have family living with you that need to stay after you pass and you don’t think they can refinance the loan (even after years of no payments), this may not be a good option for them if they can’t save up enough to move later.
We always advise borrowers and heirs to talk about future options and plans before the time comes when it is no longer an option.
What Dave Ramsey Doesn’t Tell You
Finally, the one thing that Dave doesn’t tell you is that although there are no monthly mortgage payments due on a reverse mortgage, there is never a prepayment penalty so you can make a payment in any amount at any time without penalty.
Dave says you can lose your home if you don’t pay your taxes, insurance and HOA dues but doesn’t tell you that with a regular mortgage, the same verbiage is in their loan documents as well.
You can lose any home with any mortgage (and even without a loan if you wait long enough) by not paying assessments that are due on your home.
Dave further points out all these steps you can take to make budgets and payments and put money aside with a regular mortgage and points you to a forward mortgage lender with whom he may or may not have an affiliation, but if you can make those payments, you can also do it with a reverse mortgage.
How can paying the same assessments plus a mortgage payment possibly be less risky if you run into trouble?
I don’t want to cast any aspersions on Dave because I have no actual knowledge, but since Dave has a link to an intake form with his name on it and the name of another lender, I strongly suspect that Dave is acting as a lead generation source for the lender he names for compensation (he can’t originate the loan because he is not a licensed originator so he has to send them your information as a lead if this is what he is doing).
If so, it stands to reason that this would give Dave some added incentive to push forward mortgages (and more specifically THEIR forward mortgages) because it brings him income. I’m not accusing Dave of anything, this is not illegal.
But you won’t find us pushing other programs on our website only to participate in a lead generation system. If Dave is doing this as it strongly appears that he is, I think he should be a little more honest about that in his article and tell you from the start that he is being compensated by a forward mortgage lender for all the leads he generates. What about it Dave, is this the case?
I come at this from a different perspective than Dave
I had been a mortgage banker for many years and had never originated a reverse mortgage or even knew what they were until my mother came to me, told me she was considering one and asked me what I thought of the idea.
This being almost 15 years ago now, I told her I had to investigate them, and I would let her know. For her, it was the greatest thing we could have done.
She fixed up her home, had a line of credit for other things that came up and a steady stream of additional income monthly with the modified tenure loan.
We had to move mom into assisted living a little under a year ago and sold the home she had owned for 55 years.
Because the loan was used judiciously, she had the income she needed to do the things she wanted to do, the house was in great shape and with the repairs she had made it sold easily.
Plus, there was still a lot of equity in the home when we sold it. But the biggest thing was she was able to stay in the home she loved all those years.
For the last 15 years, I have originated nothing but reverse mortgages and have saved numerous borrowers from foreclosure, some just hours from the sale.
I have counseled borrowers against the loan when it didn’t make sense and advised them to look at other options even when I knew it meant it would be a loan I would not originate as a result.
We give borrowers all the information (not half-truths like I read here) and that, Dave, is no scam!
Dave, if you’re reading this, here are a few resources I think you’ll find helpful: