A federally-insured reverse mortgage comes with the assurance that as the borrower you will receive certain loan payments as agreed upon by the terms of your loan. What’s more, you or your heirs will never be forced to repay more than your home is worth to pay off the loan regardless of the balance of the loan.
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.
Recent MIP Changes
At the end of August 2019, 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.
Upfront Mortgage Insurance Premiums (UFMIP)
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 $970,800 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”.
The balance on a reverse mortgage loan grows over time because there are no payments required from the borrowers while they live in the home. This is opposite of a forward home loan for which the borrower pays the balance down over time by making monthly payments.
As you can imagine, in some cases the loan balance on a reverse mortgage might even be greater than the value of the home itself after growing for many years with no payments by the borrower.
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.
Reverse mortgage insurance comes with a cost, but the benefits are substantial too.
If you are considering a reverse mortgage, it is important to understand the role that the mortgage insurance plays in the reverse mortgage process.
The insurance protects all parties in the transaction including the borrower, the lender, the borrower’s heirs and the investors who buy the securities backed by the loans. The insurance makes the program possible for borrowers.
Mortgage Insurance FAQs
Why is there mortgage insurance on a reverse mortgage?
On the HECM reverse mortgage program, the government charges mortgage insurance premiums in order to provide the guarantee of a non-recourse loan. If at time of loan maturity, the balance of the reverse mortgage exceeds the value of the home the mortgage insurance fund will cover the loss incurred on that loan.
Do all reverse mortgage loans require mortgage insurance?
No. The HECM reverse mortgage program has mortgage insurance premiums, but there are Non-FHA programs available in the market for certain scenarios and those programs do not have mortgage insurance.
Who insures reverse mortgages?
The HECM reverse mortgage program is insured by the Federal Government through the FHA.
How much is the mortgage insurance premium?
On the HECM program as of Jan 2022 the initial mortgage insurance premium charged is 2% of the property value or max claim (whichever is less). The current max claim is $970,800. The mortgage insurance renewal is 0.50% charged annually on the outstanding balance of the loan.
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