Reverse Mortgage Insurance Explained (2020 Update)

December 11, 2019 By Michael G. Branson 22 comments

A federally-insured reverse mortgage comes with the benefit that you, the borrower, will receive loan payments as agreed upon by the terms of your loan, and will never owe more than your home is worth.

Those benefits are guaranteed by the Federal Housing Administration through its Home Equity Conversion Mortgage program, which includes the vast majority of reverse mortgages out there.

In order to receive that guarantee, borrowers pay for it through the reverse mortgage insurance premiums.

The first is a one-time insurance payment that is made upfront, and the other is an annual insurance premium that is paid to the FHA.

2019 Changes

At the end of August, the U.S. Department of Housing and Urban Development unveiled some changes to its reverse mortgage program.

An important part of the changes included a new cost structure for reverse mortgage insurance that is required of all borrowers who have federally-insured Home Equity Conversion Mortgages.

HECM borrowers basically buy into this insurance through an upfront fee and an ongoing fee.

And like other forms of insurance, there comes with it some very important protections and benefits.

Read on to learn about reverse mortgage insurance and what it covers.

Upfront Mortgage Insurance Premiums

The first insurance cost that borrowers face is an upfront mortgage insurance premium.

This “MIP” is a flat 2% premium based on the amount the maximum lending limit of $765,600 or your home’s appraised value, whichever is less.

Ongoing Mortgage Insurance Premiums

Ongoing MIP rates are currently 0.5% of the outstanding loan balance, accrued annually and paid for when the loan is due.

Typically, mortgage insurance is designed to protect the lender in case a borrower defaults on his or her loan.

But in the case of a reverse mortgage, there are some even greater benefits specifically geared toward the borrower.

What Does Reverse Mortgage Insurance Provide?

Reverse mortgage insurance offers several important protections for borrowers. In fact, these protections are typically even greater for reverse mortgage borrowers than for borrowers who have mortgage insurance through other FHA loan programs.

That’s because they offer several key provisions, including the reverse mortgages “non-recourse feature”.

Loan proceeds are guaranteed.

Reverse mortgage borrowers can opt to receive their loan proceeds as a lump sum, as a line of credit, or in ongoing installments.

Reverse mortgage insurance guarantees that these loan proceeds will be disbursed to the borrower as agreed upon under the terms of the loan.

Even if the lender goes out of business, the loan proceeds are still guaranteed. Similarly with a line of credit, the lender cannot cancel or freeze the line of credit when this insurance is in place.

Non-recourse protection.

The balance for a reverse mortgage loan grows over time, which is contrary to forward home loans for which the borrower pays the balance down over time.

You can imagine that in some cases, the loan balance on a reverse mortgage might grow for many years, and it might even be greater than the value of the home itself.

Reverse mortgage insurance comes with a cost, but the benefits are substantial too.

By protecting both the lender and the borrower, this insurance is a key part of every reverse mortgage, and it’s important to understand just what it involves, should you become a borrower one day.

Post Tags: insurance MIP

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About the Author, Michael G. Branson

Michael G. Branson (CEO All Reverse Mortgage Inc. and moderator of ARLO™) has 40 years of experience in the mortgage banking industry and has devoted the past 15 years to reverse mortgages exclusively. Michael G. Branson was part of the team that introduced the first fixed-rate jumbo reverse mortgage to market, which was sold to a private investor in 2007.

22 Comments on this Article

I'm ARLO™ and I love responding to your questions and comments. Let's talk!

Tom U.
October 1st, 2019

Thank you.

Our balance on our reverse mortgage is now $170,000 dollars. If we sell now, after 10 years, we could sell for only $160,000 dollars. Does the reverse mortgage insurance pay the 10,000 dollar shortfall?...or do we?

Or to put it another way, if I died now, my wife would have to leave this house because she couldn't keep it up by herself. Could she just walk away from this house and owe nothing?

Thank you for your help.
Reply to Tom
- ARLO™
  October 6th, 2019
  
  Hello Tom,
  
  The reverse mortgage is a non-recourse loan which means that no matter what you owe, the lender has no recourse other than the property. If there is a balance higher than the property is worth when you leave the home, the lender can look to no other assets to repay the obligation. You paid for mortgage insurance on this loan and you and your estate are covered.
  Reply to ARLO
terry
July 7th, 2019

Where the huge problem comes in is that house insurance. As the debt accumulates the insurance will keep rising. It may get to a point that the owner cant afford it and that is why some have lost their homes
Reply to terry
- ARLO™
  July 10th, 2019
  
  Hello Terry,
  
  I do not know where you got your information, but this does not happen. The law prevents a lender from over-insuring a home. The most a lender can require is the replacement cost of the home â regardless of the amount of the loan.
  Reply to ARLO
Lily
May 21st, 2019

What happens with this PMI insurance as the loan grows? Can the .5% that is charged now grow as well?
Reply to Lily
- ARLO™
  May 21st, 2019
  
  Hello Lilly
  When you talk about loan growth, are you referring to the outstanding balance or the line of credit growth for availability of funds? As the insurance accrues but is not paid, it is added to the loan balance. But the annual renewal that you mention (.5% of the outstanding balance) is only charged on the outstanding balance of the loan. As the loan balance grows, so then would the annual MIP renewal.
  If you are talking about the growth of the line on the unused funds, it is computed in that calculation. To determine the growth in the line, you use the interest rate plus the annual MIP times the unused line amount. In other words, if your interest rate is 3.5% and the MIP is .5%. your line of credit would grow in available funds to you that year by 4% of the unused line.
  For a $100,000 line, you would have $104,000 available to you at the end of the year if you did not borrow against those funds. The growth rate in the next year would be based on the new loan amount and the interest rate in effect during that year (plus the MIP).
  This is not interest you are earning. If you borrow the money, you being to accrue interest on the funds as borrowed funds. If you never borrow the money, they never accrue interest and do not have to be repaid if you move or by your heirs at any point. You only accrue interest on money you borrow and the increase in the line doesn't mean you owe any more, that only happens if you choose to draw the funds.
  Reply to ARLO
Cliff M.
April 8th, 2019

My home will be sold "as is" for less than the loan balance. Will the FHA insurance pay the difference without questioning the low selling price? Will the family simply pay the mortgage holder the sale price and they (mortgage holder) files the insurance claim for the balance?
Reply to Cliff
- ARLO™
  April 8th, 2019
  
  Hello Clif,
  
  You can't sell a home for less than the amount owed on the loan without lender approval. If you do not get the approval from the lender in advance, your sale will not close if they do not agree to accept a payoff for less than what is owed as payment in full for the debt.
  The lender must have HUD approval if they are going to authorize any loss on which HUD will have to pay a claim. In order to authorize the sale of the property for less than what is owed on the loan (commonly referred to as a "short sale"), HUD will require the lender to obtain an appraisal on the property. If they agree that the price for which the home is being sold is the market price and that if they foreclosed on the loan they would only turn around and sell it at the same or similar price, they will approve the sale and then HUD would pay the claim for the loss.
  
  So, when you ask me will they pay the claim without questioning the low price, that answer is definitely no. There will be a lot of research to determine that the sale is an arm's length transaction and that HUD is not paying a claim that is higher than they would pay if they required the lender to foreclose and sell the property themselves.
  Reply to ARLO
orlando jimenez
February 4th, 2019

Can a private do a Reverse Mortage instead of a Company and the home owner will not have to pay any income tax
Reply to orlando
- ARLO™
  February 5th, 2019
  
  Hello Orlando,
  
  You really need to talk to your tax professional with regard to taxation. The deal with taxes has to do with when the receipt of the funds becomes a taxable event and not really from whom you borrowed the money. You should talk to your tax accountant or attorney as the fact that it is not the government program should not impact its deductibility but that's for your tax professional to check and notify you of for sure!
  Reply to ARLO
Chris Morris
November 29th, 2018

Still have a question, try to answer simply. My mother's property has a 2006 reverse mortgage with MIP. She believes that her one time upfront payment is all she has to pay. Is her '06 loan subject to the yearly .5% additional premium?
Reply to Chris
- ARLO™
  November 29th, 2018
  
  Hello Chris,
  
  Every HECM reverse mortgage has both an initial premium and an annual renewal (accrued monthly), there are no exceptions. That would also include your mom's loan.
  If you look at the paperwork she received when she applied for the loan and received again at the closing, the amortization schedule included with those documents clearly shows an additional column of annual MIP accrual and the monthly statements that she has received since will also show an amount accruing for MIP renewal ever since.
  Your mom's mortgage, originated in 2006, does have an annual MIP renewal premium that is added to the loan balance in addition to the initial premium she incurred at closing.
  Reply to ARLO
Nancy
November 1st, 2018

Hi,

I am a Financial Planner and have a question I hope you can help me with.

My client has an older Reverse Mortgage which was used to purchase a CA house in late 2012. She borrowed the original principal limit of $407,826
on a purchase price of $733,500, [Approximately 55% of the price] where the ongoing PMI fee is 1.25% and the interest being charged is 4%.

The house has been updated and is currently valued at over 1 million.

Question: Can the PMI be reduced or eliminated based on the appreciated value?

Thank you for any help you can provide.
Reply to Nancy
- ARLO™
  November 1st, 2018
  
  Hello Nancy,
  
  I can help you by giving you the answers you seek, but I am afraid it won't be what your client is hoping for. The mortgage insurance premium (MIP) is on the loan for the term of the loan, there is no way to have it dropped. The only way to eliminate it would be to pay the loan off (and payments can be made at any time in full or in part without penalty).
  
  HUD changed the program since she purchased and the Up-front MIP is now higher for new loans closed (2.5%), but the Annual MIP renewal is lower now, it is currently .50% but they also lowered the amount that borrowers receive under the program several times since 2012. So it would not benefit her to refinance the loan as rates are higher now (wiping out the .75 savings on the lower MIP factor), she would get less money requiring her to bring in a lot of cash just to close the new loan and have to pay the difference in the up-front MIP of .5% of the loan amount on the first $625,500 and 2.5% on the remaining difference up to the current lending limit of $679,650 or $4,481.25 in additional up-front mortgage insurance premium just to get less money and to lower the mortgage insurance renewal â if HUD would let you.
  
  The reason I say "if HUD would let you" is because HUD has a 5 times benefit rule to even do a refinance loan. In other words, the new loan has to benefit the borrower with additional proceeds that benefit the borrower by 5 times the cost to get the loan or they won't even let us do the loan. I don't know your borrower's age, but based on the cuts HUD has done to the program, she would have to be in her 90's before we would start to hit that 5 times benefit and I would not recommend the loan to her even if she was (and I think by now you're shaking your head and saying "Nope" as well).
  
  There are new Jumbo or Private programs that do not require mortgage insurance for which she could apply and may be eligible to receive more money or have access to more money later depending on her age, but those rates are always higher and she would be looking at close to 6% on the lowest of the available rates. Even if you add the MIP to her current rate (it's not interest but it accrues the same way), she's accruing at a combined total of 5.25% now and there are no jumbo or proprietary programs offering a rate that low. Unless her motivation for refinancing was to get more money, that would not make sense for her either.
  
  The bottom line is that the MIP cannot be removed, it's requirement is not LTV driven especially since the balance increases over time. HUD requires that the MIP be kept on the loan for the life of the loan. Also, in this market, the 4% she currently has is a very good fixed rate and not available anymore so refinancing to lower the rate is not currently an option. Long-winded answer to your question but I wanted you to know what the options were and why those really weren't good for her at this time as well. If you have any questions, please don't hesitate to ask!
  Reply to ARLO
tony fedrizzi
July 15th, 2018

What is a mortgage payee clause? Does this clause have be part of the insurance policy?
Reply to tony
- ARLO™
  July 16th, 2018
  
  Hi Tony,
  The Mortgagee's Loss Payee Clause is the clause that states that the mortgage loan holder is also a loss payee under the insurance policy. It is included in all loans, not just reverse mortgages. All Lenders require them any time a borrower obtains a loan in order to protect the lender's interest in the property as well as the borrower's.
  Without the Lender's Loss Payee clause, if a borrower suffered a loss (total or otherwise) from fire or other causes, a borrower could take the insurance payment and walk away without ever rebuilding the improvements and the lender could be left with a loan on a worthless piece of property.
  Therefore, they have the loss payee clause which requires the insurance company to make all checks out to the lender and the borrower and the lender will not sign off on the check until the property is repaired at times of damage.
  Reply to ARLO
Bob Huffman
January 10th, 2018

Your page says there were changes to the insurance cost structure for 2017/18. It presents the new cost structure, but what was the old cost structure? Are we paying more or less? Will the new rules be applied to old contracts?
Reply to Bob
- ARLO™
  January 23rd, 2018
  
  Hi Bob,
  
  I'm not sure what you mean but if you are asking whether or not existing loans will be affected by the new rules, no, all loans already closed remain under their current terms. Any new loans closed that did not get a HUD case number prior to October of 2017 will be subject to the new HUD parameters (until the change them again).
  
  HUD now charges the same initial mortgage insurance premium of 2% of the property value, the HUD lending limit or the purchase price if a purchase transaction, whichever is less. The HUD lending lime has gone up to $679,650 (from $636,150). This is different from the old method whereby borrowers were only charged .5% if they utilized 60% of the line or less in the first 12 months. However, the renewal premium has gone down from 1.25% of the mortgage balance to just .5% of the balance so some borrowers will pay more at closing on the HUD costs and all borrowers, especially those with a balance, will pay less every year.
  Reply to ARLO
ronald r phillips
September 11th, 2015

if I choose a 10 year payment on a reverse mortgage do I pay a monthly fha insurance premium or does the lender pay it and add it to my loan
Reply to ronald
- ARLO™
  December 8th, 2015
  
  Hi Ronald,
  
  The MIP renewal accrues on the outstanding balance. Both the interest that accrues and the MIP that accrues are added to the balance and each are paid when the loan is paid off. This way, if you choose to pay off the loan earlier than the 10-year term, you would only pay the amount that you actually accrued and there is never a prepayment penalty on your reverse mortgage.
  Reply to ARLO
  - Ric McCleary
    March 20th, 2018
    
    following on that line of query - is the MIP based on the total value of the loan - even if it is a line of credit that is never used?
    Reply to Ric
    - ARLO™
      March 20th, 2018
      
      Hi Ric,
      The initial Mortgage Insurance Premium is determined by the lesser of the home's value or the HUD maximum Lending Limit ($679,650). Each year thereafter, the renewal is based on the outstanding balance of the loan.
      Therefore, the initial premium is based on the value of the home regardless of whether you ever use the line or not but every year thereafter, the lower the balance is, the lower the renewal premium will be (it's .5% of the outstanding balance).
      Reply to ARLO

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Reverse Mortgage Insurance Explained (2020 Update)

2019 Changes

Upfront Mortgage Insurance Premiums

Ongoing Mortgage Insurance Premiums

What Does Reverse Mortgage Insurance Provide?

There's a New Reverse Mortgage on the Block... Meet ARLO™

Or Talk to our Human Experts! Toll Free 800-565-1722

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About the Author, Michael G. Branson

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