Last week, I wrote a piece that violated my personal blogging guidelines – it exceeded 700 words. Worse yet, I couldn’t wrap up the topic in one blog, and had to split it in two.
I fully recognize that Dave Ramsey has credibility on a national scale. But don’t take his word as gospel on the subject of reverse mortgages. For that matter, don’t take MY word on it without having done your own research. Fortunately, financial planners, retirement specialists, and academia have all done plenty of writing on the topic. The Journal of Financial Planning is loaded with data indicating that reverse mortgages offer significant financial planning advantages that homeowners should consider. In fact, reputable publications agree. The Wall Street Journal recently published an excellent article written by Professor Wade D. Pfau, which eloquently explains the non-recourse feature and line of credit growth.
“…recent research has demonstrated how financially responsible individuals can improve their retirement sustainability with a reverse mortgage.”
“These reverse mortgages are also non-recourse, which means that one never owes more than the value of their home. This can be useful in the event of declining housing prices, and for someone living sufficiently long, there is real possibility that the line-of-credit will actually grow to be more than the value of the home.”
– Professor Wade D. Pfau (blogs.wsj.com) – The Case for Reverse Mortgages
So, as a continuation of last week’s blog, let’s discuss and clarify some basic concepts Dave Ramsey still doesn’t understand.
Misunderstanding #4 – “Crazy Fees: Fees on a reverse mortgage are expensive and can cost you 10% or more of the loan amount.” – Quote from Ramsey website
Yes. There are fees just like any financial transaction, and reverse mortgage fees are not only federally regulated, they are also common to mortgage transactions. Dave’s “endorsed local providers” charge fees too, but whether they are expensive (or crazy) will depend on how the products are used and the alternatives. If Dave advocates selling the home instead, I can assure you the fees will be far greater. I’ve seen reverse mortgages in recent years where the lender pays all, or most, of the closing costs. But comparing the fees to the loan amount also shows his misunderstanding. A homeowner may have a few thousand in fees, yet not draw any home equity. In that case, the fees could be $5,000, and the loan amount would be $5,000. The fees would therefore be 100% of the loan amount. That doesn’t sound attractive until you recognize that the available and secure line-of-credit (LOC) may be $200,000 or more. That drops the fees to only 2.5% of the current outstanding benefit. This LOC also grows tax free, and can be converted later into tax-free retirement income.
Misunderstanding #5 – “You don’t make monthly payments, but if you sell the house or move out for more than a year, the loan is due and the income stops.” – Quote from Ramsey website
PARTLY TRUE, but misleading
Monthly principal and interest payments are surely not required. But Ramsey followers should instinctively ENCOURAGE homeowners to make payments, regardless of the financial tool. This will reduce their loan balance and increase their home equity. It will also boost their line of credit which, if needed, can be converted into retirement income later.
The last part of this quote is just silly – of course the loan is due when you sell the home. ANY lien against the home is paid off during closing when a homeowner sells their home.
Misunderstanding #6 – “The interest rates that they’re calculated at are horrendously bad.” – Quote from Ramsey website
Well, I guess it is possible that Dave may have inside sources that allow his followers access to 0% rates, but I promise it will not be a non-recourse loan requiring no monthly payments. The last time I checked, a 2.25% lender margin (2.411% starting rate after adding today’s 1-month LIBOR) is very attractive. On top of that, it is a non-recourse loan.
For homeowners that are using the reverse mortgage for financial planning purposes, however, there is a significant advantage in higher interest rates. 2.411% may be nice for someone carrying a large mortgage balance, but HIGHER interest rates can help other homeowners, as the available line of credit will grow that much faster.
The truth is: Younger homeowners SHOULD view mortgages as debt. They should make every effort to pay off, or pay down, mortgage balances in order to build a real estate investment for the future. Nevertheless, the home equity created by this investment should be viewed as a nest egg that may be accessed during retirement. The federal government has allowed older homeowners to draw from this nest egg, tax free, and continue to stay in their home without a monthly payment. Doing so requires a lender, a lien against the home, and a federal agency to insure the loan.
For the masses of homeowners who have the majority of their wealth tied up in their homes, let’s make sure their options are clearly explained. No more misinformation. While there are reasons to avoid a reverse mortgage, Dave Ramsey has not identified them yet.
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