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Syndicated radio and television financial pundit Dave Ramsey has attracted a large audience with his no-holds-bar blunt advice for Americans struggling with debt or seeking financial guidance. While Ramsey may be adequately knowledgeable about many topics, most notably debt management, recent comments reveal that he remains woefully ignorant about reverse mortgages.

A baseless accusation

In a recent column by The Street Ramsey boldly asserts, “Reverse mortgages sound like a good plan — after all, who wouldn’t want a dream retirement funded entirely by their house! But here’s the truth: Reverse mortgages are major rip-offs”. As per previously baseless accusations against the loan Ramsey conveniently never specifies how a reverse mortgage is a bad deal only focusing on the loan’s upfront costs. 

Ironically Ramsey notes, “Homeowners who take out a reverse mortgage put up their house as collateral for the loan — that means you lose your house if you don’t live up to the terms of the loan”. Well, that’s precisely what you have with a traditional mortgage! So are 15 or 30-year mortgages scams as well, Mr. Ramsey?

It’s not the interest rates

“Reverse mortgages are especially risky for seniors because they carry high interest rates. Accruing debt could easily lead to defaulting on the loan and house foreclosure”. Again, a simple Google search would save Mr. Ramsey and Ramsey Solutions the embarrassment of spreading false information- a bad look for any company whose reputation hinges on the financial advice given to listeners and viewers. Also, what’s typically risky and conveniently not mentioned is that for older homeowners with a fixed income, the burden of a monthly mortgage payment is a clear and present risk.

The truth is the rates for today’s Home Equity Conversion Mortgage (HECM) or federally-insured reverse mortgage are quite similar to traditional mortgages. The issue isn’t the interest rate, but that most borrowers do not make optional principal and interest payments.   This means the accrued interest and FHA mortgage insurance premium are added to the previous month’s balance negatively amortizing over the life of the loan therefore increasing the ultimate amount due.

The myth of no home appreciation

What Ramsey and others also fail to mention is that a home with or without a mortgage or reverse mortgage for that matter appreciates just the same as any other. Reverse mortgage borrowers who didn’t take out all the proceeds could have a significant amount of remaining equity at the end of the loan which can be passed onto the homeowner’s children or heirs.

For example, a couple with a $700,000 home gets a reverse mortgage to pay off their existing mortgage balance and eliminate their required monthly principal and interest payments of  $1,800. Their starting balance (UPB: Unpaid Principle Balance) including financed fees and the mortgage payoff totals $200,000. If their monthly interest rate averaged 7 percent and you add another half-percent for the required FHA insurance premium their loan balance would be approximately $892,163 in 20 years. However, if their home appreciated by an average of three percent annually the home would be worth roughly $1.2 million leaving over $372,000 in remaining equity. Even better, the homeowners increased their monthly cash flow by $1,800 retaining $21,600 in cash each year and $432,000 in 20 years. . 

Final observations

It’s unfortunate but not surprising to see pundits like Ramsey and others continue to disparage a loan that could have brought financial relief to older homeowners who were cash-constrained or sought to leverage their home’s value without required loan payments. “It seems nobody wants a reverse mortgage, but everyone wants what the reverse mortgage does for them. Clearly there is a disconnect between the product and what people think about the product”, said industry author and expert Dan Hultquist.

True. That disconnect will continue as long as financial pundits and commentators place high theatre and entertainment over providing their audience with accurate and responsible information.