Debunking Dave Ramsey’s Take on Reverse Mortgages: The Truth About HECMs

Reverse mortgages have long been clouded by misconceptions, deterring many older homeowners from considering their potential benefits.

In a recent article in TheStreet, personal finance expert Dave Ramsey called reverse mortgages a major "mortgage mistake.” A well-known advocate for debt-free living, Ramsey has consistently criticized reverse mortgages as risky and a “rip-off.”

But with evolving regulations, stronger consumer protections, and high borrower satisfaction, do his concerns hold weight? Let’s take a closer look at today’s reverse mortgages and see how they compare to Ramsey’s long-standing skepticism.

What Is a Reverse Mortgage?

A reverse mortgage is a specialized home loan for homeowners 62 and older, allowing them to access a percentage of their home equity without monthly principal and interest payments (borrowers must still pay critical property charges like taxes and insurance). They can defer repayment of the loan balance until they pass away, sell the home, or move out of the home.The most widely used reverse mortgage—and the only one insured by the Federal Housing Administration (FHA)—is the Home Equity Conversion Mortgage (HECM). For clarity, we’ll focus on HECMs as we address Ramsey’s concerns.

Ramsey’s Concern:

"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.”

The Reality:

While reverse mortgage borrowers must meet certain loan obligations, including paying the essential property charges like taxes and homeowners insurance, this responsibility isn’t unique—it applies to all home-secured loans, including traditional mortgages. 

Before key safeguards were introduced last decade, some HECM borrowers with significant home equity but limited residual income faced challenges covering property expenses after depleting their loan proceeds. However, today’s reverse mortgage program includes robust consumer protections designed to help prevent these situations:

• Financial Assessment Requirement (Since 2015) – Ensures borrowers have sufficient credit history and residual income to sustain homeownership costs, significantly reducing defaults.
• Initial Disbursement Limits – Limits first-year withdrawals (except for large mortgage payoffs at closing) to help preserve home equity and long-term financial stability.
• Life Expectancy Set-Aside (LESA) – Like an escrow account, a LESA can set aside loan proceeds to automatically cover future property charges over the youngest borrower’s expected lifetime.

These protections help ensure borrowers can remain in their homes, reducing the risk of foreclosure due to unpaid essential property expenses.

Ramsey’s Concern:

"Why in the world would you want to risk losing your home—the most valuable thing you own—in your senior years? And talk about stress! Try getting a good night’s sleep when the future of your home is up in the air."

The Reality:

For homeowners carrying a traditional mortgage into retirement, a HECM can be a financial game-changer. By using loan proceeds to pay off their existing mortgage at closing, borrowers eliminate monthly principal and interest mortgage payments, freeing up cash flow for other retirement priorities (while still covering property taxes and insurance).

Without a required monthly mortgage payment, seniors can retain homeownership and age in place more comfortably, reducing financial strain. Any remaining loan proceeds can be used however they see fit, such as:

• Making home renovations for safety and accessibility
• Covering medial expenses (i.e., in-home care costs)
• Creating a financial safety net for unexpected expenses

For many retirees—even those who own their home outright—a HECM doesn’t add stress; it relieves it. By reducing financial burdens and offering greater flexibility, a reverse mortgage can provide peace of mind in retirement and help them to stay in their home. In fact, a HECM borrower might just sleep better than someone still struggling to make ends meet.

Ramsey’s Concern:

“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 . . . Oh, and did we mention that interest on your reverse mortgage starts building from the moment you take it out and doesn’t stop until it’s paid back . . . Reverse mortgages also always come with a bunch of ridiculous fees.”

The Reality:

A Home Equity Conversion Mortgage (HECM) accrues interest and mortgage insurance premiums over time, leading to a growing loan balance. However, borrowers have full control over their repayment strategy—they can make voluntary prepayments at any time to manage the balance or defer repayment to maximize cash flow.

Importantly, foreclosure risk has nothing to do with the interest rate on a HECM. Since repayment is typically deferred, the loan balance can grow without impacting the borrower's ability to remain in their home. As long as they meet their loan obligations—such as paying property taxes, homeowners insurance, and maintaining the home—they cannot be forced to leave, regardless of how the loan balance or home value changes over time.

Regarding fees, while HECMs generally have higher costs than traditional mortgages, these costs serve a purpose—primarily funding FHA insurance, which:

• Protects borrowers by ensuring they or their heirs will never owe more than the home’s value at sale*
• Guarantees access to loan proceeds even if the lender goes out of business
• Allows repayment flexibility with no required monthly mortgage payments (must still pay property taxes and insurance)

Additionally:

• All costs are clearly disclosed upfront in a Good Faith Estimate (GFE) 
• Nearly all fees can be rolled into the loan, minimizing out-of-pocket expenses 
• HUD-mandated counseling ensures borrowers fully understand the loan terms and responsibilities

Our article about HECM costs will include a detailed breakdown.

Ramsey’s Concern:

"You’ll likely owe more than your home is worth… and you could leave your family a huge mess."

The Reality:

Mortgage insurance payments (typically rolled into the loan) go into the Mutual Mortgage Insurance Fund. The FHA uses this fund to cover insurance claims from lenders when a home's sale price is less than the loan balance. This non-recourse protection ensures borrowers and their heirs are never responsible for any shortfall when the home is sold and repayment is due*.

Heirs Have Options:

• Keep the home – Pay the lesser of the full loan balance or 95% of the home’s appraised value, typically through refinancing.
• Sell the home – Use the sale proceeds to pay off the loan and keep any remaining funds.
• Walk away – If selling the home doesn’t make financial sense, heirs can sign a deed-in-lieu of foreclosure with no personal liability.

Rather than leaving heirs with financial burdens, a HECM provides multiple, well-defined repayment options—ensuring flexibility and protection.

Additionally, many adult children end up supporting aging parents financially. By strategically tapping home equity, a reverse mortgage can relieve heirs of that burden, helping borrowers better manage their expenses. In some cases, strategically drawing down on home equity via a HECM can even preserve other productive assets—such as retirement savings or investments—allowing borrowers to potentially leave a greater overall net worth to their family**.

Final Thoughts

A reverse mortgage isn’t for everyone, but for many, it’s a powerful home loan—offering flexibility, security, and peace of mind in retirement. As with any financial decision, it’s important to understand the details, evaluate personal circumstances, and consult a trusted advisor(s) before making a choice.

For older-adult homeowners seeking a cash-flow friendly way to leverage home equity, a HECM may be worth a closer look.

*There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance and maintaining the home. Credit subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.

**This article does not constitute financial advice. Please consult a financial advisor for your specific situation.