A federally insured reverse mortgage assures that, as the borrower, you will receive certain loan payments as agreed upon by the terms of your loan.
You or your heirs will never be forced to repay more than your home is worth to pay off the loan, regardless of the loan’s balance. The Federal Housing Administration guarantees those benefits through its reverse mortgage program, the Home Equity Conversion Mortgage.
Borrowers pay for government insurance on their loan programs and reverse mortgages through insurance premiums known as Up-Front Mortgage Insurance Premiums (UFMIP) and the annual renewal mortgage insurance premium (MIP).
Upfront Mortgage Insurance Premium (UFMIP)
The first insurance cost that borrowers face is an upfront mortgage insurance premium. This “UFMIP” is a flat 2% premium based on the amount the maximum lending limit of $1,149,825 or your home’s appraised value, whichever is less.
Annual Mortgage Insurance Renewal
Ongoing renewal mortgage insurance premium “MIP” rates are 0.5% of the outstanding loan balance. The MIP accrues monthly, but borrowers pay this when the loan is paid in full. On a standard or forward mortgage, mortgage insurance protects the lender if a borrower defaults.
But in the case of a reverse mortgage, there are some even more significant benefits geared explicitly toward the borrower.
Who Does Reverse Mortgage Insurance Benefit?
Reverse mortgage insurance offers several important protections for borrowers. These protections are typically even greater for reverse mortgage borrowers than borrowers with mortgage insurance through other FHA loan programs (or conventional loans with private mortgage insurance).
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 no payments are required from the borrowers while they live in the home. This is the 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 home’s value after growing for many years with no payments by the borrower.
Guarantees Access to Funds
Reverse mortgage borrowers can receive their loan proceeds as a lump sum, a line of credit, or in ongoing installments. The reverse mortgage insurance guarantees that these loan proceeds will be disbursed to the borrower as agreed upon under the loan terms.
The loan proceeds are guaranteed even if the lender goes out of business. This is especially beneficial for borrowers who receive the funds over time, such as by receiving monthly payments or a line of credit to use when they desire.
With a reverse mortgage, the lender cannot cancel or freeze the line of credit when this insurance is in place, unlike traditional bank products that can be frozen, reduced, or eliminated at the lender’s discretion.
Weight the Costs vs. Benefits
If you are considering a reverse mortgage, it is important to understand the role 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 Requirements Across Different Loan Types
|Type of Mortgage
|Conditions for Mortgage Insurance
|HUD Reverse Mortgage
|Federal Housing Administration insured loan.
|Required for all loans.
|Proprietary Reverse Mortgage
|Proprietary and Jumbo reverse mortgages carry no insurance premiums
|United States Department of Agriculture loan for rural homebuyers.
|Required for all loans.
|Standard home mortgage not insured by a government agency.
|Typically if down payment is less than 20%.
|Yes, if down payment < 20%
|Department of Veterans Affairs loan for service members and veterans.
|Funding fee required, no monthly MIP.
|Yes (Funding Fee)
Why is there mortgage insurance on a reverse mortgage?
The government charges mortgage insurance premiums on the HECM reverse mortgage program to guarantee a non-recourse loan. If the reverse mortgage balance exceeds the home’s value at the time of loan maturity, 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 Non-FHA programs are available in the market for specific scenarios, and those programs do not have mortgage insurance.
Who insures reverse mortgages?
The Federal Government insures the HECM reverse mortgage program through the FHA.
How much is the mortgage insurance premium?
On the HECM program as of Jan 2024, the initial mortgage insurance premium charged is 2% of the property value or max claim (whichever is less). The current max claim is $1,149,825. The mortgage insurance renewal is 0.50%, charged annually on the loan’s outstanding balance.
If I refinance my reverse mortgage to a new reverse mortgage, do I have to pay the full 2% mortgage insurance again?
Not the first time you refinance, but that can change if you refinance more than once. As we show, when refinancing an existing HECM, your Up-Front Mortgage Insurance Premium (UFMIP) for the first time you close a reverse mortgage on your home is 2% of the property value or the HUD maximum lending limit, whichever is less. Your second and subsequent loans use a formula that we will go into below to determine how much you will pay that takes into consideration how much UFMIP you paid on the reverse mortgage you closed just before the one you are closing at that time and then give you credit for UFMIP paid on the prior loan.
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