Understanding Reverse Mortgage Insurance Premiums: Is Insurance Really Necessary?

Seniors who take advantage of the reverse mortgage programs offered by the Department of Housing and Urban Development (HUD) will be expected to pay two distinct mortgage insurance premiums. The first will be an upfront mortgage insurance premium, or MIP, that is collected by the Federal Housing Administration (FHA) immediately after the loan is closed. The second MIP is an annual premium equal to 1.25% of the borrower’s current loan balance. Since these costs are fairly sizeable, many seniors want to know exactly what they get in return. Fortunately, seniors get a lot for their money. MIPs offer security, reliability and, most importantly, peace of mind. Why Reverse Mortgage Borrowers Are Required to Pay MIPs Home Equity Conversion Mortgages are reverse mortgages insured by the Federal Housing Administration. In recent years, some banks have suffered in this volatile market. Fortunately, because HECMs are insured by FHA, seniors can be sure that they will receive all loan proceeds due to them. This means that, if a senior’s lender goes out of business, FHA would make sure the individual kept receiving his or her proceeds in accordance with the terms of the loan. rnSeniors who choose a proprietary reverse mortgage do not have that security. If a borrower’s lender were to go under, the individual’s proceeds would not be insured by the government. While the loan would probably be sold and serviced by another company, there might be a delay in the borrower’s usual payment method. Borrowers who normally receive monthly payments, for example, may not receive their proceeds for a few months until their account is transferred to a new lender. Because a reverse mortgage carries federal insurance, it is also a non-recourse loan. This means that borrowers can never owe their lender more than the current market value of their home. In the event that a borrower's loan balance exceeds the value of his or her home when it comes time to repay the loan, FHA would compensate the lender for the difference. Since a reverse mortgage can never be underwater, seniors can rest easy knowing that they are not putting themselves or their heirs at risk. How to Lower Reverse Mortgage Insurance Premiums All HECMs carry annual MIPs equal to 1.25% of the current loan balance. For some borrowers, annual MIPs add up faster than for others. Seniors who choose the lump sum payment option, for instance, will pay more in MIPs than borrowers who choose monthly payments. Different loan products also carry different upfront MIPs. The HECM Standard, which is the most popular HECM, carries an upfront MIP of 2% of the maximum claim amount. The HECM Saver almost eliminates this cost entirely. Seniors who choose this product will only pay an upfront MIP of 0.01% of their claim amount. The downside is that the Saver offers payouts that are around 10 to 18 percent less than the Standard. For most seniors, the lower MIP is not worth the smaller payout. Still, seniors should carefully consider all of their reverse mortgage options and select the loan they are most comfortable with.