Why Mortgage Insurance for Reverse Mortgages? And an even better question – why so expensive?

First, as a reminder, a Reverse Mortgage is a financial tool that allows a borrower, 62 and older to access a portion of the equity in your home and pay it back only when you no longer live in the home. The amount of money available to you increases with age – so at 82, you get access to more equity than at 62.

Government backed Home Equity Conversion Mortgages (HECMs) require an upfront mortgage insurance premium (MIP) of 2% of the national loan limit or the appraised value, which ever is less, plus an ongoing premium of 0.5 percent added to the agreed upon interest rate. The mortgage insurance is mandatory, non-negotiable, and only mathematically adjusted if you are refinancing a HECM loan under a prior loan limit.

So how much is that? For a property valued at or above $625k, the upfront MIP is $12,510 – and most borrowers think that is somewhere between WOW and OUCH. What does the MIP get you? Lots and Lots.

The mandatory mortgage insurance actually serves two purposes protecting both the borrower and the lender. The borrower is protected if the lender, or his loan servicing company goes out of business. The government will step in to make sure the borrower has continued access to loan funds. Moreover, the borrower benefits from low interest rates since the lender is protected against future loss.

The lender benefits by being protected if the borrower owes more money than the value of the home at the time the loan is due. All HECM Reverse Mortgages are “non-recourse” loans. That means that the borrower (and/or his heirs) can never owe more than the value of the property at the time the loan is due. So if the borrower’s debt is greater than the value of the property, the government then steps in to make the lender whole.

Since the lender’s risk is reduced, this allows the lender to lend more money and to offer far lower rates than generally seen in the marketplace. For example, this week certain types of adjustable rate mortgages will start at 2.1% prior to the MIP and 2.6% with MIP included – WOW. Fixed rate mortgages are hovering around the 5.5% rate prior to the MIP and 6% with MIP included.

But here’s the really big WOW -- In today’s competitive market, some lenders are offering to pay the full upfront MIP on fixed rate loans. That, along with other incentives to loan originators (people like myself), make it possible to offer a zero closing cost fixed rate Reverse Mortgage. That’s a big WOW considering that just one year ago, closing costs for a counterpart loan was nearly $21k. So WOW, again.

HECM loans have been regulated by the government for nearly 20 years. The various loan formulas are specified by the government are the same for all lenders. One key component is that the calculations are based upon living to age 100 (not that uncommon these days). So mortgage insurance may be particularly desirable and beneficial.

In considering a Reverse Mortgage, it is essential to understand the detailed features and requirements of each type of loan. You need to gather information from sources that are knowledgeable -- understand the nuances between the competing products -- and are committed to provide straight answers to all of your questions.

If you would like a free information packet on the reverse mortgage options available for your family, please contact me at my office at 650.591.4430. Judy Schwartz Reverse Mortgages Only (650) 591-4430