While reverse mortgages have long battled a less-than-stellar reputation – thanks to commonly spread myths and misconceptions – the truth is that today’s reverse mortgages are not what they were years ago. And with more and more people realizing the benefits of tapping into home equity, reverse mortgage loans continue to gain popularity among retired senior homeowners.
By now you may be familiar with some of the key benefits of a reverse mortgage: an additional source of funds to better manage retirement expenses, the ability to comfortably “age in place” in your home, and the ability to make optional monthly mortgage payments 1 – or none at all. But perhaps some of the most overlooked benefits of reverse mortgage loans are the borrower safeguards that are now part of the program – including reverse mortgage insurance.
What is reverse mortgage insurance?
Home Equity Conversion Mortgage (HECM) reverse mortgage loans are insured by the Federal Housing Administration (FHA). As such, these loans offer several important borrower protections. Reverse mortgage insurance assures that as a borrower, you will receive loan payments as outlined and agreed upon by the terms of a loan. What’s more, since reverse mortgages are non-recourse loans (more on this in a bit), this coverage ensures that you and your heirs aren’t personally liable if the loan amount exceeds the home value when the home is sold and the loan is repaid – regardless of the loan balance 2 .
Reverse mortgage insurance premiums are made up of two costs – a one-time upfront insurance payment known as the Initial Mortgage Insurance Premium (IMIP) and an annual insurance premium (MIP) paid to the FHA.
Initial Mortgage Insurance Premium (IMIP)
Paid upfront, the initial mortgage insurance premium is a flat 2% premium due at the time of closing. The 2% is based on the lesser of your home’s appraised value or the maximum lending limit, currently $1,089,300 for 2023. The IMIP is standard across all HECM loans and lenders.
Annual Mortgage Insurance Premium (MIP)
In addition to the IMIP paid at the time of closing, you’ll also need to pay an annual mortgage insurance premium (MIP). This premium is equal to 0.5% of the outstanding mortgage balance and is accrued annually. The MIP does not need to be paid for until the loan becomes due and payable.
What does reverse mortgage insurance provide?
So now that we’ve covered the costs and premiums associated with reverse mortgage insurance, you’re likely questioning what exactly this coverage means for you. The two main benefits of reverse mortgage insurance are guaranteed loan proceeds and as previously mentioned, non-recourse loan protection.
Guaranteed Loan Proceeds
Whether you opt to receive your loan proceeds as a lump sum, line of credit, or ongoing installments, reverse mortgage insurance guarantees that you will receive these proceeds as outlined under the terms of the loans. Should the lender cease operations or go out of business, you are still guaranteed your loan proceeds. And in the case of a line of credit, reverse mortgage insurance prevents the lender from canceling or freezing these terms.
Non-Recourse Loan Protection
As non-recourse loans, reverse mortgages will never require you or your heirs to owe the lender more than the home’s current market value at the time of its sale. Should the loan balance be greater than the home’s appraised value, this excess is covered by the mortgage insurance premium that you’ve paid over the life of the loan.
And there you have it – the facts on mortgage insurance premiums. While reverse mortgage insurance comes at a cost, the benefits have the potential to pay off in dividends. If you are considering a reverse mortgage, having a good understanding of the costs and borrower safeguards is key.
At Longbridge Financial, we’re here to help. Our team of reverse mortgage consultants are experts in the business and can help answer any questions you may have. Better yet, we’re committed to recommending the reverse mortgage program only after we make certain that the loan is a good option for you and meets you needs.
Want to learn more? Contact the Longbridge team today.
1 Real estate taxes, homeowners insurance, and property maintenance required
2 The loan balance increases over time as interest on the loan and fees accumulate