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Ask Dave

Not Technically a Scam

Larry asks what Dave's opinion is on reverse mortgages.

QUESTION: Larry asks what Dave’s opinion is on reverse mortgages.

ANSWER: It’s not technically a scam, although some of them are. The concept is not technically a scam. It’s just a bad deal. It’s a really bad deal. It’s a really bad deal because the interest rates are bad and the fees are unbelievably high. The ones that are scams are because they’re primarily marketed to the elderly, and the elderly are always a target of con artists. So a percentage of reverse-mortgage deals are absolute con-artist things that are not real reverse mortgages, but a real reverse mortgage is a “legitimate” product. It’s just a bad product. It’s just very, very, very expensive.

The idea is very simple. It’s that when you have your home paid for and you’re at a certain age of life, instead of paying payments to pay down a mortgage, you receive payments and your mortgage goes up. You get a monthly payment. When you get the monthly payment, then every month the balance against your home—the lien against your home—is increasing. You’ve worked your whole life to get your home paid off, and now you’re systematically going back into debt step by step by step by step.

There are a couple of different ways upon death that a reverse mortgage is handled. On the worst ones, the property is just turned over to the company. On the best ones, the balance is there, and the property, of course, the balance has to be paid in order for the heirs to keep the property upon your death.

They’re pitched as one of two things. One, a way for broke people that have a paid-for house that are broke otherwise to stay in their paid-for home and have money to eat with. That’s typically the way they’re pitched. Also, financial planners—and I use the term loosely—some of them sell reverse mortgages with the idea being that you use that monthly income to not cash out the investment that they’re making a commission on or to put money into an investment they’re making commission on—this crap of harvesting your equity, which is a classic, ridiculous idea that has floated around the financial-planning community from time to time.

In general, my opinion is that the reverse mortgage is crap. It’s mainly crap for two reasons. One is that you’re taking old people that have a paid-for home and putting them back into debt. That’s obviously a dumb idea. And then the second problem with it is the interest rates and the fees are just ridiculous. They get you coming and going on these things. Before you would do that—and I wouldn’t recommend this either—you’d just go take out a big mortgage. You’ve got a paid-for house. Go borrow $100,000 and put $100,000 in the bank and use some of it to pay your new house payment with and some of it to live on. Then you’ve got money to live on. You’re back in debt, but at least that mortgage is not killing you with fees and gotchas and ridiculous interest rates. At least that’s a pretty generic product that is monitored in the marketplace.

Again, reverse mortgages are garbage—absolute garbage.

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