The federally insured reverse mortgage product known as a Home Equity Conversion Mortgage (HECM) has been around for over 30 years. During many of those years, the most vocal critic of the product was author and radio personality Dave Ramsey.
But why is this important to homeowners? Because Ramsey is one of the most listened-to financial gurus on the planet.
Many Ramsey listeners are steered away from using this product because he doesn’t really think it’s a good choice. However, the HECM has actually been enjoyed by many homeowners who overwhelmingly rate themselves as “satisfied” or “highly satisfied” with the results. But there is still a divide between those who think it’s a smart move and those who don’t.
Common misconceptions
Ramsey and his writers at Ramsey Solutions tend to tell older homeowners that, “you’ll likely owe more than your home is worth.” Ramsey Solutions also claims, “not only are reverse mortgages a black hole of fees, but your older loved ones could also end up owing more on their home than it’s worth, or worse, losing their home altogether.”
Fortunately, both statements conflict with federal law regarding reverse mortgages. One of the first lessons a reverse mortgage prospect learns from their reverse mortgage specialist is that FHA guarantees this cannot happen. In fact, every reverse mortgage applicant is required to complete a HUD-approved counseling session where the non-recourse clause is covered. But remember, 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.
Understanding leverage
The main conflict between Dave Ramsey and reverse mortgages lies in his passionate aversion to debt and his belief that all debt is bad debt. While these concerns are definitely valid (because no one really likes debt), leveraging assets can be a strategic financial move.
Ramsey is actually associated with Churchill Mortgage, a reputable firm that uses debt to achieve the dream of homeownership. In this case, the debt seems to be good or useful in helping people with homeownership.
Consider this scenario example: a retired homeowner with a home valued at $450,000 with no existing mortgage balance. She decides to use some of her equity to pay off $50,000 in medical debt and high-interest-rate consumer debt caused by unforeseen circ*mstances. Keep in mind the resulting HECM balance is financed at 2% to 3% and has no required monthly principal and interest repayment obligation*. It also does not disrupt the homeowner’s traditional retirement plan. In our view, that is a proper use of home equity in retirement.
Unfortunately, because of the misconceptions, some Ramsey followers are so afraid of using the most powerful lever they own (home equity), which could affect their ability to consolidate debt and withstand financial shocks on a fixed income.
When home equity is used as a substitute for withdrawals from retirement accounts, several financial planning researchers have proved that though equity may decrease, there is potential for the overall net worth to increase, which could create greater wealth while alive and is instrumental in leaving a larger legacy for the next generation.
*Qualification is required. Borrower is required to pay all property charges including, but not limited to, property taxes, insurance and maintenance.
Fact-checking Ramsey’s claims
Let’s fact-check some of Dave Ramsey’s most harmful claims about reverse mortgages.
Claim #1: “Over 100,000 reverse mortgages have failed, resulting in foreclosures and evictions.”
FALSE.
The cited figure is misleading. Yes, in the aftermath of the housing meltdown 12 years ago, there were about 100,000 foreclosures that involved homeowners who had reverse mortgages. However, those foreclosures were not failures of the reverse mortgage.
Almost all those foreclosures occurred from 2008-2012, and almost all of them were what we would describe as “beneficial” or “neutral” foreclosures from the borrower’s perspective. Meaning that there was either more money borrowed than a home sale could satisfy after the death of the last borrower or the foreclosure was the result of property tax default and not because the borrower had a reverse mortgage.
Remember, a reverse mortgage eliminates the required mortgage payment* and gives the borrower cash. This should not make them more likely to default on their tax bill.
*Qualification is required. Borrower is required to pay all property charges including, but not limited to, property taxes, insurance and maintenance.
FALSE.
This statement is designed to create fear that the reverse mortgage will stick the heirs with a bill or cause them to lose the home.
The US Department of Housing and Urban Development (HUD - the regulator of the HECM product) and The Federal Housing Administration (FHA, the insurer of the HECM product) allow heirs six months to sell the home and up to two 90-day extensions (up to 12 months) to sell the home. Ramsey doesn’t discuss that this sale is a form of inheritance for the heirs and is a favorable option for them.
Also, most heirs are content to sell the home and receive the remaining equity. Plus, if they sell the home— even if it is underwater— they have the potential for a tax deduction*, too!
*Should not be construed as legal or financial advice. Please consult a tax professional/financial advisor.
Claim #3: “…you won’t qualify for a reverse mortgage if your home is worth more than a certain amount.”
FALSE.
Lenders do not disqualify a borrower for a HECM because their appraisal came in higher than expected. Yes, HUD does establish HECM limits each year. However, when a home appraisal exceeds the HECM limit, this does not hurt the borrower’s chances of qualifying for an HECM in any way.
For example, the HECM product in 2021 provides insurance to the lender of the home’s value up to $822,375. This limit simply restricts the home value to $822,375 when calculating the proceeds.
For example, a borrower with a $1m home who qualifies for proceeds of 60% will not qualify for $600,000 in principal. Rather, they will qualify for 60% of $822,375, or $493,425. In essence, a borrower with a home value that exceeds $822,375 has simply maximized their initial principal limit for this product.
Other false claims
While we won’t have time to cover each false claim in detail, here are some other notable past statements from Dave Ramsey and Ramsey Solutions that unfairly downplay the HECM product:
“…you’ll pay a hefty mortgage insurance premium that protects the lender (not you) against any losses.”
FALSE. The primary purpose of the Mortgage Insurance Premium (MIP) is to pay for losses resulting from the non-recourse nature of the product. This is primarily for the benefit of the borrower and their heirs, as well as the investor who owns the paper. That lender would likely not have made that same loan—for the benefit of the borrower without the guarantee from the FHA mortgage insurance.
“You are also required to take a loan for the maximum amount you qualify for.”
FALSE. This is not only false, but the Federal Government PROHIBITS borrowers from taking all the proceeds upfront unless needed to pay off large mortgage balances at closing. This has been HUD’s policy since 2013 called “initial disbursem*nt limits.”
“The interest rates that they’re calculated at are horrendously bad.”
FALSE. For most of the years since the beginning in 1988, HECM rates have been at, or below, conforming interest rates.
“Servicing fees. These are another monthly expense coming your way with a reverse mortgage.”
FALSE. While HUD permits the use of Servicing Fees, we haven't seen a HECM servicing fee in over ten years.
Remember, it’s YOUR retirement
The federally insured reverse mortgage product is continually being improved with new consumer protections and long-term advantages for those who wish to age in place. It’s important to do your own research and not let everything you hear from others impact your retirement cash flow decisions.
Want to learn more about how a reverse mortgage might work for you? Reach out to a Movement Mortgage loan officer near you today!
*This material has not been reviewed, approved, or issued by HUD, FHA, or any government agency
