Best-selling author, and nationally syndicated radio personality, Dave Ramsey, has helped millions of individuals find financial peace with his sound budgeting advice. While this is worthy of applause, the mainstream financial planning community regularly disagrees with his guidance. The Motley Fool even describes his retirement planning advice as “dangerous.”
It saddens me that while reverse mortgage professionals across America are passionately helping older homeowners with debt consolidation and prudent financial planning, Mr. Ramsey holds them back. One of the most misinformed “planners” in the country has one of the loudest voices. So, I feel compelled to call him out. What I find however, is that I am not alone. Many others have investigated, and written their concerns about this growing problem.
“He’s huge… which makes him being wrong about something important a real problem, because he can spread incorrect information like a virus, infecting millions of people, and causing significant harm as a result.” – Martin Andelman (Mandelman Matters) Why Can’t Dave Ramsey Get his Facts Straight on Reverse Mortgages?
“He writes books; He knows about money – He must be right, I should follow his advice AND teach others to follow his advice… This is a dangerous premise and one that is somewhat unpopular for me to write about.” – Harlan Accola (Wisconsin Christian News) The Fallacies of Christian Financial Advice
Initially, I thought the problem was simply a fundamental difference in the way we view home financing. Maybe his personal problems with debt that forced him into bankruptcy caused a heightened sense of hatred toward banks and lenders. But, it appears that he simply has not done his research. Some of what he says may have been true in the 60’s and 70’s before federal regulation of the industry. But claiming these things are true today, is no different than saying “Dave Ramsey has a debt problem, and is facing bankruptcy.” It is no longer true and irresponsible to say.
I have been through “Financial Peace University” and really enjoyed it, but Dave has had over 25 years (since reverse mortgages became federally-regulated) to get his facts right. So, let’s discuss and clarify some of the concepts the he doesn’t explain correctly.
Misunderstanding #1 – “because interest accrues over the life of the loan, your debt can ultimately exceed the value of your home.” – Quote from Ramsey website
One of the first items addressed in nearly every basic training on reverse mortgages is that FHA insures against this ever happening. The FHA GUARANTEES that homeowners and their heirs will NEVER owe more than the value of their home. This is called a “non-recourse” clause, and is not only a primary consumer advantage, it is something that every reverse mortgage applicant is required to be counseled about.
Misunderstanding #2 – “You are also required to take a loan for the maximum amount you qualify for.” – Quote from Ramsey website
Not only false, the Federal Government PROHIBITS borrowers from taking all the proceeds up front unless needed to pay off large mortgage balances or other mandatory obligations that must be satisfied at closing. Yes, fixed rate products only allow a one-time distribution, but homeowners have ALWAYS had options where full distribution was not required. Even with the fixed rate, homeowners had the option of paying down loan balances at any time with funds they didn’t need.
Misunderstanding #3 – “If your loan exceeds the value of your home, you or your heirs will have to make up the difference if the home isn’t sold when the loan is due.” – Quote from Ramsey website
Once again, he has not read the federal regulations and consumer protections that are fundamental to this program. The non-recourse feature prevents any recourse to the homeowner or their heirs. In addition, the home is rarely sold when the loan is due. The heirs are given ample time to sell it and receive their inheritance if the homeowner has passed away with home equity. If no equity exists, the heirs may obtain the home at a discount (95% of appraised value). Yet, even if the home doesn’t sell, there is no recourse. The heirs do NOT have to “make up the difference.”
The truth is: There are really good reasons NOT to get a reverse mortgage. I will write on that topic shortly, but Dave Ramsey’s blanket statements condemning the product are hurting older homeowners.
The truth is: Seniors HAVE lost their homes after getting a reverse mortgage. Yes, it is possible for ANYONE that owns a home to lose it. If you stop paying your property taxes, you may risk losing your home. That is true whether you have a reverse mortgage, forward mortgage, or no mortgage at all. Instead of scaring seniors, the reverse mortgage should actually REDUCE the fear that this will happen. Periodic draws from their home equity should actually INCREASE their ability to pay their property charges.
The truth is: reverse mortgages can be very effective at debt reduction, which is a passion that I share with Mr. Ramsey. Imagine paying off tens or hundreds of thousands of debt with reverse mortgage proceeds that allow homeowners the ability to pay off the new loan balance much faster, at interest rates in the 2%-4% range.
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