The Federal Housing Administration guarantees the benefits of a reverse mortgage through reverse mortgage Insurance.
Reverse mortgage insurance premiums protect both lenders and borrowers, from a possible default. The first premium is a one-time upfront payment. You pay other premiums every year to the FHA.
Recently, the federal government has made some changes in reverse mortgage insurance programs.
Read further to know why reverse mortgage insurance is important. Also, read about the latest updates made in the program.
What Is Reverse Mortgage Insurance?
After closing a HECM, you will pay a mortgage insurance premium (MIP). The FHA calculates it according to the proceeds amount you borrow during the first year. If this sum is less than 60 percent of available funds, you only pay an upfront MIP of 0.5 percent of the appraised value of your home.
You can save your proceeds and spend money to decrease the chance of default.
For example, suppose the value of your home is $100,000. If 0.5 percent is $500 and 2.5 percent is $2,500, you save $2,000 if you withdraw less than 60 percent of your mortgage proceeds.
The MIP is charged annually and is not determined according to your remaining loan proceeds. It accrues over time and is paid once the loan becomes due and payable. The annual reverse mortgage insurance premium is 1.25 of the overall outstanding mortgage balance.
But even if the MIP adds up to this balance, you will never have to pay more over than your home’s value when the mortgage is due and payable. This means a reverse mortgage is a non-recourse loan.
Why Reverse Mortgage Insurance Is Necessary?
By including the MIP on insured HECM mortgages, the government protects both borrowers and lenders. Pooling the money from MIP in the country allows the government to pay back lenders who lose money on defaults.
It also ensures that if a reverse mortgage lender goes out of business, you can still access your proceeds. The MIP guarantees you never owe more than your home’s value when the HECM becomes due and payable. In simpler words, reverse mortgage insurance is important for a happy retirement.
Reverse Mortgage Insurance Premium [2019 Updates]
In August 2019, the U.S. Department of Housing and Urban Development (HUD) made some changes in the reverse mortgage program. All HECM borrowers must follow the updated cost structure for HECM insurance.
Paying Mortgage Insurance Premiums Upfront:
You pay the first insurance premium upfront. You pay it as MIP, flat 2% premium according to the maximum loan limit of $726,525 or the appraised value of your home, whichever of these is less.
Ongoing Mortgage Insurance Premiums:
Ongoing MIP rates are 0.5% of the outstanding mortgage balance. It accrues yearly and is payable once the loan becomes due.
Reverse Mortgage Homeowners Insurance Requirements
Benefits Of Reverse Mortgage Insurance
Reverse mortgage insurance protects borrowers. It serves like a protection to your retirement income. These protections are greater for HECM borrowers than for those with loan insurance through other FHA loan programs.
That’s because they offer provisions, such as it is a non-recourse reverse mortgage.
Guaranteed Loan Proceeds:
You can choose to receive mortgage funds as a lump sum, in installments, or as a line of credit. Reverse mortgage insurance assures that you receive funds as agreed upon, in any case. If you choose a line of credit, the lender cannot freeze or cancel the line of credit, if the loan is insured.
HECM balance grows over time. It is opposite of forward mortgages for which you pay the loan balance down over time. The reverse mortgage balance can increase for many years to sum even higher than the value of your home.
As you see, reverse mortgage insurance is essential for both lenders and borrowers. Though you have to pay a cost for the insurance, the advantages are worth it.
Keep yourself updated with all the latest changes in the HECM program and pay your insurance premiums appropriately.
You can contact a reverse mortgage lender to get familiarized with a reverse mortgage and insurance claims.