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. Moreover, 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.
Why is there mortgage insurance on a reverse mortgage?
Do all reverse mortgage loans require mortgage insurance?
Who insures reverse mortgages?
How much is the mortgage insurance premium?
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.
When you refinance a HECM reverse mortgage with a new HECM reverse mortgage, HUD will give you credit for the UFMIP that you paid on the reverse mortgage loan just before the one you are closing at that time. This credit is usually large enough so that the first refinance for most borrowers allows them to pay very little to no UFMIP on that first refinance. HUD will only give you credit for any UFMIP you paid on the loan you closed just before each time you refinance. What this means is that if you refinance the loan a second time (which would be your third reverse mortgage on the same property), when you look back to determine how much UFMIP credit you will receive based on what was paid on the prior loan, there is often no credit available because borrowers often pay very little or no UFMIP on their previous (second) transaction on the refinance. If the loan limits, rates, and values were to make it feasible for a 4th transaction, whatever UFMIP paid by the borrower on the third transaction would be available for credit on that fourth transaction (looking back at the previous transaction where the borrower did pay UFMIP).
So, for example, when you got your first reverse mortgage, let’s say you paid 2% based on the property value or the HUD maximum claim amount. If you did the loan in 2016 at the maximum claim amount at the time of $636,150, the amount of UFMIP you would have had to pay would be $12,723. But let’s assume you were in an area where your home experienced strong appreciation after 2016. Since it increased in value considerably after 2016, you decided to refinance in 2020 when the HECM max lending limit was $822,375 (and for argument’s sake, let’s say your home was then valued at $822,375 as well). The refinance rule was that you would pay 3% of the difference of the UFMIP based on the value or maximum claim amount, which would be $186,225. When you multiply that by 3% or .03, it equals $5,586.75. In our example, since you paid $12,723 on the last loan, the credit HUD allows for the first payment was higher than the new premium, so you would owe no UFMIP on this refinance.
The UFMIP would be calculated the same way for any new refinances, but the credit for UFMIP already paid changes on subsequent refinances because it only considers the UFMIP you paid on the immediately preceding loan. Continuing our example, let’s assume that your home is worth $1,100,000 in June of 2023 when you want to refinance again (which is over the current HUD maximum lending limit of $1,089,300 but the numbers are based on the HUD maximum or the property value, whichever is less). Your new maximum will be based on the HUD maximum lending limit, and the difference in value between your refinance in 2020 and today is $266,925 ($1,098,300 minus $822,375 = $266,925) when you multiply that by 3% or .03, that totals $8,007.75. This would be the amount due for UFMIP on this refinance. You would now have to pay UFMIP again because you paid no UFMIP on your last loan, and any credit would be determined by the amount you paid on your last loan. Since you paid no UFMIP on your last loan, HUD would give no credit for UFMIP on this refinance.
This is one of the reasons lenders have difficulty quoting accurate UFMIP costs to borrowers when first speaking to them about reverse mortgage refinances when they need all the information. Suppose the Loan Officer needs to have all the information about prior loans and fees paid. In that case, they cannot give a completely accurate accounting of HUD charges until they know how many times the loan has been refinanced, what fees were paid, credits received, etc., as the amounts can change if they don’t have the correct information.
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