Whether Reverse Mortgage Loans Require Mortgage Insurance?

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A reverse mortgage could provide much-needed funds for basic living expenses, medical care, and home maintenance. Nonetheless, reverse mortgages can be prohibitively expensive for some homeowners due to numerous fees.

Whether Reverse Mortgage Loans Require Mortgage Insurance?

A particularly burdensome expense is the mortgage insurance premium required by the lender (MIP). If you have a government-backed home equity conversion mortgage (HECM), you will pay an initial MIP at closing and annual MIPs for the duration of the loan.

• Reverse mortgages can provide much-needed funds during retirement, but the high costs associated with these loans make them an undesirable option for many homeowners.

•The home equity conversion mortgage (HECM), insured by the Federal Housing Administration (FHA) and offered by FHA-approved lenders, is the most prevalent reverse mortgage.

• HECM borrowers must pay an initial mortgage insurance premium (MIP) of 2% at closing in addition to an annual MIP of 0.5% of the outstanding mortgage balance.

• HECM MIPs are costly, but they provide important protections for borrowers.

• Due to the open-ended nature of reverse mortgages, interest and fees may accrue for an extended period of time before you or your estate can repay the loan.

What Is a Reverse Mortgage?

A reverse mortgage allows you to convert a portion of your home's equity into cash without having to sell the property. You do not make monthly payments to a lender; instead, the lender gives you a lump sum, a monthly amount, or a line of credit in exchange for a portion of your home equity. Interest and fees accrue over the life of the loan, which is due when the home is sold, vacated, or the borrower dies.

To be eligible for a reverse mortgage, you must be at least 62 years old, have significant equity in the home, and reside in the home as your primary residence. You must also attend a counselling session approved by the U.S. Department of Housing and Urban Development if you obtain a HECM, the most common type of reverse mortgage (HUD). After approval, you can use the funds for things like basic living expenses, healthcare costs, home renovations, or even a new home if you have a HECM for Purchase loan.

Some proprietary reverse mortgages allow borrowers as young as 55 years old.

What Is Mortgage Insurance?

With traditional mortgages (sometimes referred to as forward mortgages), mortgage insurance protects the lender, not you, in the event that you default on your mortgage payments, die, or are otherwise it will be unable to meet the terms of the loan.

MIPs and private mortgage insurance (PMI) are not the same. If your down payment is less than 20% of the home's purchase price as well as you finance with a conventional mortgage loan, private mortgage insurance is typically required. However, you must pay MIPs if the Federal Housing Administration (FHA) guarantees your mortgage. These include an upfront MIP equal to 1.75 percent of the loan amount plus annual MIPs for minimum 11 years, regardless of your down payment size.

MIPs are required for all HECM reverse mortgages. Most proprietary reverse mortgages do not require upfront or annual MIPs, but their interest rates are typically higher.

Reverse Mortgage Insurance for Reverse Mortgages

Reverse mortgages are insured differently than conventional mortgages. Instead of merely protecting the lender, MIPs provide reverse mortgage borrowers with several important assurances.

• A borrower will receive loan payments in accordance with the loan's terms, even if the lender ceases operations.

• When the loan is due and the home is sold, you or your estate cannot owe more than the home's value.

• If you or your heirs decide to pay off the loan and keep the home (rather than selling it), you will not owe more than the home's appraised value.

At closing, you pay a 2% MIP based on the lesser of the FHA's maximum loan limit of $970,800 or the home's appraised value. For instance, if the value of your home is $250,000, the initial MIP would be $5,000 ($250,000 0.02). You can either pay in cash or use funds from your loan.

After that, your lender will assess annual MIPs equal to 0.5 percent of the loan balance. Typically, these premiums accumulate over time, and you (or your estate) pay the total when the loan is due.

What is the cost of mortgage insurance?

If you have the most common type of reverse mortgage, a home equity conversion mortgage (HECM), your lender will charge you an up-front mortgage insurance premium (MIP) of 2% of the appraised value of your home, up to the Federal Housing Administration's maximum lending limit of $970,800. (FHA). After that, an annual MIP equal to 0.5% of the outstanding balance of your loan will be assessed.

Can a reverse mortgage avoid mortgage insurance?

You can avoid paying MIPs by obtaining a reverse mortgage with a proprietary lender. However, due to higher interest rates, the loan may cost more in the long run. If you have a HECM, however, you will owe upfront and annual MIPs.

However, in exchange for those premiums, you receive a number of crucial safeguards. Specifically, the loan proceeds are guaranteed (even though the lender goes out of business) and you or your estate will not owe more than the home's value when the loan matures and the property is sold.

Do reverse mortgages incur closing fees?

Reverse mortgages, like conventional mortgages, incur closing costs. For instance, if you obtain a HECM loan, you will typically pay the following fees:

Mortgage Insurance Premiums — an initial MIP of 2% due at closing and an annual MIP of 0.5% of the  balance outstanding mortgage balance

Third-party expenses — such as appraisal, title search, title insurance, surveys, inspections, recording fees, mortgage taxes, and credit checks

Origination fee — the greater of $2,500 or 2% of the first $200,000 of your home's value plus 1% of anything over $200,000, up to a maximum of $6,000

Servicing fee —  monthly fee up to $30 and with an annually adjusting or fixed interest rate loan, and monthly fee up to $35 if the interest rate adjusts monthly.

The Bottom Line

HECMs require upfront and annual MIP payments. Unlike traditional private mortgage insurance, which protects the lender, reverse mortgage insurance benefits the borrower.

If you decide that a reverse mortgage is right for you, shopping around and comparing loan costs could save you money. Although all lenders charge the same MIPs, the origination fees, servicing fees, closing costs, and interest rates varies by lender.


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