Reverse Mortgage Basics: Reverse Mortgage Insurance
A common question is why do I have to pay mortgage insurance on a reverse mortgage? The answer is protection. For the borrower, a federally-insured reverse mortgage comes with the benefit that you will receive loan payments as outlined by the terms of the loan, and you will never owe more than your home is worth. This benefit is guaranteed by the Federal Housing Administration through its Home Equity Conversion Mortgage program, which is the primary reverse mortgage program available on the market today.
In order to be protected and receive that guarantee, borrowers pay for it through reverse mortgage premiums. There is a one-time upfront mortgage insurance premium at the time of closing the loan, as well as an annual insurance premium which are both paid to FHA.
Currently, as of the date of this article, the upfront mortgage insurance premium is a flat 2% of the appraised value of the home or the FHA maximum lending limit of $679,650, whichever is less. The ongoing annual premium is calculated as .5% of the outstanding balance and is accrued monthly.
With conventional mortgage products, mortgage insurance is designed to protect the lender in the case that the borrower defaults on his or her loan. However, a reverse mortgage provides additional protection and benefits for the borrower which are far greater than other FHA loan programs.
One of those protections is that reverse mortgage loan proceeds are guaranteed to be disbursed according to the terms of the loan even if the lender goes out of business or the market takes a dive. This includes a borrower who has his or her funds in a line of credit option, in which that line of credit cannot be cancelled or frozen as long as the borrower continues to meet his or her three ongoing requirements of the loan: maintain primary residence, timely payment of property charges and routine home maintenance.
The other protection is what is referred to as a "non-recourse loan". Since there are no required monthly payments with a reverse mortgage, the loan balance grows over time which is contrary to a conventional mortgage that requires monthly payments in order to pay the balance down. In some cases with a reverse mortgage, the loan balance might grow for many years and might even outgrow the value of the home. If this occurs, the non-recourse feature means that the borrower never has to pay more than the value of the home when the loan becomes due. The home is the only collateral for the reverse mortgage loan, therefore the borrower does not have to worry about the lender going after any other assets. If there happens to be a shortage at the maturity of the loan, the FHA insurance will pay the lender any amount that the home cannot cover, so that both the borrower and lender are always protected.
Check back for more reverse mortgage basics topics.
For more information on reverse mortgages and other related topics contact:
In order to be protected and receive that guarantee, borrowers pay for it through reverse mortgage premiums. There is a one-time upfront mortgage insurance premium at the time of closing the loan, as well as an annual insurance premium which are both paid to FHA.
Currently, as of the date of this article, the upfront mortgage insurance premium is a flat 2% of the appraised value of the home or the FHA maximum lending limit of $679,650, whichever is less. The ongoing annual premium is calculated as .5% of the outstanding balance and is accrued monthly.
With conventional mortgage products, mortgage insurance is designed to protect the lender in the case that the borrower defaults on his or her loan. However, a reverse mortgage provides additional protection and benefits for the borrower which are far greater than other FHA loan programs.
One of those protections is that reverse mortgage loan proceeds are guaranteed to be disbursed according to the terms of the loan even if the lender goes out of business or the market takes a dive. This includes a borrower who has his or her funds in a line of credit option, in which that line of credit cannot be cancelled or frozen as long as the borrower continues to meet his or her three ongoing requirements of the loan: maintain primary residence, timely payment of property charges and routine home maintenance.
The other protection is what is referred to as a "non-recourse loan". Since there are no required monthly payments with a reverse mortgage, the loan balance grows over time which is contrary to a conventional mortgage that requires monthly payments in order to pay the balance down. In some cases with a reverse mortgage, the loan balance might grow for many years and might even outgrow the value of the home. If this occurs, the non-recourse feature means that the borrower never has to pay more than the value of the home when the loan becomes due. The home is the only collateral for the reverse mortgage loan, therefore the borrower does not have to worry about the lender going after any other assets. If there happens to be a shortage at the maturity of the loan, the FHA insurance will pay the lender any amount that the home cannot cover, so that both the borrower and lender are always protected.
Check back for more reverse mortgage basics topics.
For more information on reverse mortgages and other related topics contact:
Certified Reverse Mortgage Professional (CRMP)
NMLS# 473353
Toll Free (877) 500-0454
Local (702) 460-6222
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