Reverse mortgage insurance for the HECM program is designed to protect both borrower and lender if the home isn’t worth enough to settle the entire balance at the time the loan is due and payable.
This insurance, which is assessed by FHA, is what enables the HECM reverse mortgage to be a non-recourse loan, which means that the most that is ever repaid is the value of the home – even if it’s not worth enough to settle the entire loan balance.
This means that HECM reverse mortgage borrowers never need to worry about leaving a big mess to their heirs if the home is worth less than what is owed.
Why Reverse Mortgage Insurance?
The HECM reverse mortgage is a home loan designed to give seniors 62 years of age or older the ability to convert home equity into cash that can be used for any purpose. No monthly payments are required and the loan doesn’t have to be repaid as long as at least one borrower is living in the home and paying the required property charges (property taxes, homeowner’s insurance, etc.).
Because the HECM is open-ended, accrues interest, and is designed to give borrowers access to more cash over time, it’s possible the loan balance could exceed the value of the home at some future date, especially if home values fall.
Reverse mortgage insurance is primarily intended to protect both borrower and lender against the risk of loss if the home isn’t worth enough to settle the entire loan balance. It also protects the borrower by making sure any money remaining in the reverse mortgage is still available even if the lender goes out of business.
Reverse mortgage insurance comes in two flavors: initial mortgage insurance premium (IMIP) and annual mortgage insurance premium (MIP).
Initial Mortgage Insurance Premium (IMIP)
Initial mortgage insurance premium, or IMIP, is a one time fee paid at loan closing to FHA to help insure the HECM reverse mortgage. How much the fee is depends on the initial loan amount.
If your initial loan amount is greater than 60% of the principal limit (the total pool of cash available in the reverse mortgage), FHA charges an IMIP fee of 2.50% of the maximum claim amount (usually the appraised value). If your initial loan amount is less than 60%, the IMIP is 0.50% of the maximum claim amount.
IMIP rates are subject to change by FHA at any time. Note that these IMIP rates are current as of April 5, 2017.
FHA charges the higher reverse mortgage insurance rate for larger starting loan balances ecause there’s an increased risk the loan could be upside down in the future, which means FHA may have to cover part of the loan balance from the insurance fund. Remember, the HECM reverse mortgage is a non-recourse mortgage, so the most that is ever paid back by the borrower is the value of the home – even if the home isn’t worth enough to cover the entire balance. It’s the FHA insurance fund (which IMIP fees go into) that is on the hook to make up the shortage so that the borrower or lender doesn’t have to.
Most lenders allow borrowers to roll this fee into the new loan amount so that it doesn’t have to be paid out of pocket. Depending on the loan scenario and the current interest rate environment, some lenders may be willing to cover all or part of this fee with a lender credit.
Annual Mortgage Insurance Premium (MIP)
Annual mortgage insurance premium, or MIP, is assessed at an annual rate of 1.25% of the loan balance for as long as the HECM reverse mortgage is in effect. MIP accrues just like interest and doesn’t have to paid out of pocket. If you choose not to make payments on the reverse mortgage (which is the whole point, right?), then the MIP is simply added to the loan balance.
MIP rates are subject to change by FHA at any time. Note that this MIP rate is current as of April 5, 2017.