Since 1961, Senior homeowners have benefitted from reverse mortgages. Over the years, the program has evolved and become safer for seniors. It is the most regulated mortgage with the most safeguards and oversight from HUD, Congress, and state governments.

If this is true, why do they have such a bad reputation? One reason is from 1961-1988 there was no government oversight, and some people were taken advantage of. After 1988 when President Reagan and Congress passed the Home Equity Conversion Mortgage bill or HECM, the program became safer and more widely accepted.

Another reason is respected financial gurus like Dave Ramsey and Suze Orman give out false and misleading information online, on air and in print about the program. Mind you, they are not licensed or trained loan officers. To be fair, a large majority of loan officers don’t even know how reverse mortgages work!

Here are some quotes from Dave Ramsey on reverse mortgages along with my response.

“Reverse mortgages are a scam, and they’re designed to take advantage of people.” So, Dave Ramsey thinks that HUD and the FHA who administers the program are scamming and taking advantage of senior homeowners and have been doing so since 1988!

“If you want to retire with dignity, reverse mortgages should not be part of your retirement plan.” If people don’t have enough money to pay their bills and enjoy their retirement, where is the dignity in that?

He argues that “reverse mortgages are predatory, designed to take advantage of homeowners, particularly seniors.” Ramsey Solutions The fees are set and regulated by HUD and state governments, so is he asserting the government is preying on seniors?

Dave Ramsey, a well-known personal finance advisor, strongly advises against reverse mortgages, labeling them as “scams” and “ridiculous.”  Facebook What is ridiculous  about helping a senior homeowner:

-remain at home and age in place

-retain ownership on title

-maintain their independence, dignity, and lifestyle

-sustain and protect about 35-40% of their home equity from a market downturn

-refrain from making a monthly PI mortgage payment

-gain access to home equity that can grow by compound interest tax free, and is non taxable when withdrawn

Ramsey’s primary concerns include:

  • High Costs: He emphasizes that reverse mortgages come with substantial fees and interest, which can erode home equity over time. Ramsey Solutions  If someone takes his suggesting of downsizing, they will pay up to 6% to sell their home. Fees on a reverse mortgage range from 3-4%, one time and can be rolled into the loan.
  • Risk of Foreclosure: Ramsey warns that failing to meet obligations such as property taxes, insurance, and maintenance can lead to foreclosure, leaving homeowners without their primary residence. Ramsey Solutions This is true. However, whether you have a reverse mortgage, traditional mortgage or no mortgage, if you don’t pay the property taxes on time, you risk foreclosure.
  • Impact on Heirs: He points out that reverse mortgages can complicate inheritance, potentially leaving heirs with less or no equity in the property. Ramsey Solutions How does it complicate an inheritance to refinance a reverse mortgage or pay it off when the home sells?  A senior homeowner is able to borrow about 35-40% of the value of their home. Yes, that balance does accrue interest, and if no payments are made, and none are required, the equity will be less. But with most reverse mortgages taken out in recent years, there will be equity at the end, albeit less.

Ramsey suggests alternative strategies for those considering reverse mortgages, such as downsizing, budgeting, or seeking additional income sources, to avoid the pitfalls he associates with these financial products.  Ramsey Solutions Yes, downsizing is an option. When I mention it to my clients, they groan as they don’t want to move unless the home no longer suits them in this stage of life. Research shows 91% of senior homeowners want to age in place. As for additional income sources, the average age of someone taking out a reverse mortgage is 74, when I mention going back to work, they scowl and say something like I’ve worked my whole life, I want to enjoy my grandkids, volunteering at my church, gardening, traveling. By not having a mandatory monthly mortgage Principal and Interest payment or tapping into their home equity, this is possible. As for budgeting, most of the clients I help do budget, but with high inflation and their living longer, the chance of them outliving their resources is heightened.

Suze Orman a renowned personal finance expert

Age Consideration: Orman cautions against taking out a reverse mortgage at the earliest eligible age of 62, suggesting that it may be risky to do so without exhausting other options first.  Fool When is the best time to start earning compound interest? The earlier the better. A reverse mortgage can come with a line of credit. For example, let’s say someone owns their home outright. It’s worth $400,000. The return on investment for that equity is 0%. They can borrow approximately 35% of the value of the home.  Let’s say on average the line of credit grows at 6% a year for the next 12 years. Now that equity available to them has doubled to $250k, which they can turn into tax free monthly payments if needed. If the borrower takes out $1500/mo for 12 years, and make no mortgage payments, they will have the same amount of equity at year 11 as they do at year 23.

Understanding Loan Mechanics: She emphasizes the importance of fully comprehending how reverse mortgages work, noting instances where individuals were unaware that proceeds would first be used to pay off existing mortgages, leaving them with less available funds than anticipated. HousingWire This is why it’s important to work with a mortgage broker who specializes in reverse mortgages. Yes, if there is an existing mortgage, that has to be paid off, as the reverse mortgage has to be in first position.

Orman suggests exploring other financial avenues before considering a reverse mortgage, such as downsizing to a more affordable home or utilizing a home equity line of credit. I compare a home equity line of credit to a reverse mortgage line of credit using a baseball analogy. It’s like Single A baseball vs. the Major League World Series.

Both will give you access to your equity on your primary home.

A HELOC has a 10 year draw term and a 10 year repayment term.

A Reverse mortgage line of credit has a 150 year loan term based on the youngest borrowers age, the loan is repaid when the home is sold or refinanced, when the last borrower permanently moves out.

A HELOC is more affordable, but the line of credit can be cut, frozen or full payment demanded, without notice or cause. With a reverse mortgage, the available equity is protected from a market downtown

Both charge interest, a HELOC’s interest is 2-3 points higher than a reverse mortgage.

A HELOC allows someone to borrow up to 80% of the home’s value, a reverse mortgage is 35-40%.

A HELOC has a mandatory payment due every month, there is no monthly payment due with a reverse mortgage.

A HELOC requires an above average credit score, there is no credit score requirement to qualify for a reverse mortgage

Who is a good fit for a reverse mortgage?

Someone who wants to remain at home and age in place. Who wants to maintain their independence, dignity and lifestyle. Desires to remain an owner on title.  Someone who wants to make their mandatory monthly principal and interest payment options. One who desires to access and grow their equity tax free.