I think Dave Ramsey is a national treasure. We have followed and benefited from his wisdom over the years. If I agreed with everything he says about Reverse Mortgages, I couldn’t be in this business.
With that understanding, let’s look at what I consider to be deal “maker or breaker” issues. This material is sourced from What Is A Reverse Mortgage, Ramseysolutions.com
#1 Deal Maker or Breaker:
“A reverse mortgage is nothing more than a predatory program designed to take advantage of you.”
The Reverse Mortgage program was designed by the US Govt to help seniors, especially those of modest means, stay in their homes. In the 12+ years I’ve been originating loans, the HECM program has evolved to the specific benefit of seniors.
2017 is a benchmark-year for significant changes that were designed to halt some of the “predatory-like” policies that are mentioned. Here are two advancements in particular:
First, the addition of the financial assessment of a borrower’s ability to meet the terms of the loan. The assessment gives us the ability to look at the credit and payment histories of potential borrowers. That helps the responsible and hinders the less-responsible borrowers.
Second, a limit on the initial draw-amount or “cash-at-closing.” The whole program is far more balanced and sensible. I’ve had very few borrowers’ take a “max-cash” draw at closing. Most of my borrowers don’t actively use their line of credit, they tend to “set-it and forget-it.”
FHA insures the HECM (home equity conversion mortgage) Reverse Mortgage, that MI (up front mortgage insurance) guarantees the terms of the loan for the benefit of the homeowner not for FHA. (The mortgage insurance on a traditional/forward FHA mortgage insures the lender)
I call that protection, not predation. A Deal-Maker. You decide what you think.
#2 Deal Maker or Breaker:
“…homeowners who take out a reverse mortgage put up their house as collateral for the loan—can we talk for a second about how risky that is?
A great question, how risky is that?
If you have a traditional/forward mortgage, your home, your creditworthiness and paying the property taxes and homeowners insurance are collateral for the loan.
Your timely payments are a requirement of the terms of that loan. If you get far enough behind, the very real risk is foreclosure, and there are few viable options at your disposal.
I think that is risky for people on fixed incomes who have multiple years of mortgage payments laid out ahead of them.
With a Reverse Mortgage, your home and the FHA insurance are the collateral for your loan. You are not required to make a payment, you are still required to pay your taxes and homeowners insurance. (the same is true on any type of mortgage financing)
If you don’t keep your taxes and homeowners insurance current, if you neglect those requirements, there is a risk that you could lose your home.
If you have a Reverse Mortgage and you can’t meet your requirements because of a hardship, a health crisis, loss of income or the death of a spouse, you have options. Communicate your situation with your loan servicer to access those options. You don’t need to ignore or fear your trouble.
Reverse lenders understand the things that can happen to senior borrowers. I have seen them exercise “extreme-compassion” to keep Reverse Mortgage borrowers in their homes.
Far less risky than trying to remedy a mortgage-shortfall on your own.
*Even if your home is paid off, you still need to pay your property taxes. Homeowners insurance is at your discretion but, in my opinion, it’s never a good idea to leave your home unprotected.
A Deal-Maker in my book. You decide what you think.
#3 Deal Maker or Breaker:
“You could leave your family a huge mess”
Well, if you do bite the dust before paying off your loan, your family will have two options: Pay back the entire amount you owe, or give up your home to the bank. Is that really the sort of situation you want to leave your family in when you die? Is that what you want your legacy to be?
If the family only had those two options, that would be a Deal-Breaker for me.
First option, pay back the amount you owe:
Your family doesn’t owe the balance of your Reverse Mortgage, your estate doesn’t owe the balance of your Reverse Mortgage, so who does? Your home and your rich uncle Sam. (The FHA-Mortgage insurance you paid for.) They pay, not the family or the estate.
Second option, give up your home to the bank:
If your home is underwater (more is owed than it’s worth) you give the keys to FHA and they take it from there. You can never owe more than the net-proceeds of the sale of your home.
If your home still has equity, (and most will) your estate can sell the property, pay off the loan balance and distribute the difference according to your wishes. Or, if your estate decides to pay off the loan and keep your home, they can do that according to your estate plan.
Not much of a mess if you don’t leave one. Deal-Maker to me. You decide what you think.
#4 Deal Maker or Breaker: The Ramsey Solution.
“Literally anything would be better than taking out a reverse mortgage. (Okay, maybe not robbing a bank or committing tax fraud.) But seriously, if you’re strapped for cash, there are better options than these horrible programs.”
List of solutions:
- Get a Job. Keep working and max-out your retirement plans.
- Sell your house and downsize. Pay cash for something smaller.
Only you can decide if number 1 is a viable options for you. Since we live in Colorado, let’s discuss option #2. Sell, downsize and pay cash for a smaller home.
The reality in our state is this; suitable homes are scarce, (downsizing). Competition for those “right-sized” homes is fierce and paying cash for those homes is common, and not the exception. Also, qualifying for a new forward mortgage is difficult on retirement income, especially if you were having a tough time making ends meet before.
In my experience, people do Reverse Mortgages because they want to stay in their home, not move to another. When we talk about options, everything is on the table but I never forget who’s table I’m sitting at.
My average borrower is about 72, no longer in the work-force, with a mortgage of about $150,000. After looking at “all the above” a Reverse Mortgage looks pretty good to them.
If you have a better option, take it. If not, that’s a Deal-Maker. You decide.
The Bottom Line: Deal Maker Or Breaker.
If you accept the Ramsey Reverse Mortgage premise: “Reverse Mortgages are major rep-offs.” That is a deal-breaker for you, regardless of any other perspective. Try one of his solutions and I wish you all the best.
If you are open to other perspectives, including ours, that is a deal-maker. Over the years about 50% of the people I’ve done loans with asked me about what Dave Ramsey says. Those conversations were the basis of this blog and video.
Thanks, Mark Schmidt
Founder, Remarkable Reverse Mortgage
