WHY DOES DAVE RAMSEY HATE REVERSE MORTGAGES?
About a year or so back, Dave Ramsey put out a nasty video on YouTube about reverse mortgages. In his opening monologue, he couldn’t see why a 92 year old lady who needed a little bit of cash to live comfortably would take a reverse mortgage.
Uncle Dave argued that she should take a 15 year mortgage(you know, the kind where she’d have to make mortgage payments until she was 107). For those who aren’t that financially literate, he failed to point out that the monthly mortgage payment of a 15 year mortgage is higher than a 30 year mortgage(or a reverse mortgage…but that one’s obvious), and that very few seniors on fixed income are likely to be able to afford it.
The fact that a person with a pretty prominent following would say something like that is irresponsible, dangerous, and deserves an educated response.
As usual, my main response is in a video…so if you like these sorts of things, click below to watch.
Now that you’re done watching, let’s pow wow for a bit. Dave Ramsey is seen as a financial guru to many people. He hates reverse mortgages(his words, not mine), but he has other “unique” ideas about money as well.
IS IT A 3% RULE OR AN 8% RULE?
The most striking view of his that I disagree with the most(besides his reverse mortgage babble) is that retirees should withdraw 8% of their retirement portfolio each year. Remember, many financial experts dictate that one can “safely” take no more than 3% annually.
Why just 3%(it actually used to be 4%)? Here’s the deal, as of 2019 the stock market has been humming. Which obviously is great for all of us stock owners.
But remember what happened in 2008? If you don’t, here’s a quick refresher. In 2008 many stocks imploded, and the market actually lost a little over 50%. Now, if you’re still working, you’re feeling the pain, but you’ve got time to recoup that money.
But if you’re retired and on a fixed income its a different story. When a market drops 50%(or even just 20 or 30 percent), it is very difficult for it to recover to its original point. Even in a very aggressive “Bull” market it will still take years. And seniors just don’t have that time to wait for recovery.
Now, let’s talk about an example. Sarah is in her 80’s and depending on her investments to live. She listened to Dave Ramsey, who told her she should be taking 8% out of her retirement accounts each year. Now, common sense(or is it MATH) dictates that drawing money out of an investment that’s already dropping will cause that investment to run out of money quickly. At a 4% annual withdrawal its scary. 8% is SUICIDE.
Not to mention that because she’s in her 80’s, Sarah won’t have enough time for the money to build back, even if the economy does incredibly well.
Now in Uncle Dave’s mind, your retirement accounts should average a 12% performance over the years. But what about seniors who experience a “Bear” market like 2008? At that point, drawing your accounts down at 8% a year, again is suicide.
This is just one example that hopefully sets the table for Dave’s wisdom on a product that he obviously doesn’t understand; the reverse mortgage.
Dave’s argument with reverses goes as follows…
✔ People with reverse mortgages have lost their homes due to tax foreclosures, so they must be unsafe.
✔ Reverse mortgages have interest rates higher than the average 15 year fixed rate, so they must be rip offs.
Let’s tackle both of these issues.
First, it is true that folks with reverse mortgages have lost their homes to tax foreclosure. In fact, before the reverse mortgage rules changed in 2015, there were quite a few reverse mortgage tax foreclosures.
HOW SENIORS HAVE LOST THEIR HOMES IN A REVERSE MORTGAGE
Back before May of 2015, if you had a pulse and equity in your home you could get a reverse mortgage. Lots of times seniors used reverses as “bailouts”, to get them out of a mortgage that they were behind on. Because the industry didn’t check income, they couldn’t verify if a senior could afford to stay in their home AFTER they got a reverse mortgage.
Now, as responsible homeowners, we all realize that we’ve got to pay our property taxes, or eventually the Tax Man will Cometh. But some seniors either couldn’t afford their property taxes, or decided not to pay them. Either way, because the taxes were delinquent the senior eventually lost their house.
THE MORAL OF THE STORY IS PAY YOUR PROPERTY TAXES AND YOU WON’T EVER LOSE YOUR HOME
But then came May of 2015. Fortunately, the experts at HUD and the FHA enacted a financial assessment, which led to only seniors who could actually afford to stay in their home long term being able to get a reverse mortgage.
Here’s how it works. If you have a pattern of lateness on your bills, or you don’t have enough income to afford all of your bills, the reverse mortgage must set up an escrow account for your property taxes and homeowners insurance for the remainder of your lifetime expectancy. By the way this is called a LESA(lifetime expectancy set aside).
If the loan isn’t big enough to fund the LESA, then you won’t qualify. Again, we don’t want to loan money to people who aren’t financially able to stay in their homes long term. It just doesn’t make sense.
This LESA went a LONG way to ensure that reverse mortgages weren’t temporary band aids. These are supposed to be loans that will keep you in your home for the rest of your life, with financial security.
RIGHT NOW TODAY’S NEW REVERSE MORTGAGE IS SAFER THAN EVER
It’s just unfortunate that “experts” like Dave Ramsey(and yes Suze Orman too) don’t recognize this reality.
Now, let’s look at Uncle Dave’s next issue with reverses.
Dave Ramsey states that because reverse mortgage interest rates are slightly higher than regular mortgage rates, that they are a rip-off.
He’s right that the rates are higher. But, when you have an 83 year old senior who needs to get rid of her mortgage payment so she can afford to live in her home(where she REALLY WANTS to live), how does any other mortgage(even one with lower rates) make sense?
A slightly higher interest rate does not impact our senior at all, because she doesn’t need to pay it on a month to month basis(or ever). I will step in and say the she DOES NEED to keep her property taxes and homeowners insurance current(as you probably know).
DOES IT MAKE ANY SENSE FOR A SENIOR ON FIXED INCOME TO GET A 15 YEAR MORTGAGE WITH A HIGH MONTHLY PAYMENT?
Yes, its also true that a senior’s heirs will get less out of the home than if the senior didn’t get a reverse mortgage. But, did you know that with a reverse mortgage the kids will get your home when you pass away?
And what’s more important, living in YOUR home(that you paid for with your own money) comfortably or struggling so you can give your children a few dollars?
Now, I’m the last guy to say that reverse mortgages are for everybody. They aren’t.
If you’re looking for a quick fix, this isn’t a good loan for you.
If you won’t be able to afford your regular expenses even with a reverse mortgage, you need to seriously consider downsizing.
On the other hand, if you own your home and have some equity that you’d like to use, its worth investigating. Be objective. Look at the pros and cons.
And then if you qualify(by the way, not everybody qualifies for a reverse mortgage), we’d be glad to show you EXACTLY how it would work for you and your financial situation.
To get in touch, feel free to email us at firstname.lastname@example.org or call (267) 289 1095.