Reverse Mortgages & MIP
While we're expecting private reverse mortgages to come back into the marketplace, at this point, over 95% or reverse mortgages written today are the FHA insured variety known as HECM or Home Equity Conversion Mortgage. With FHA loans comes mortgage insurance. Many people are curious why mortgage insurance would be charged on reverse mortgages since borrower's have quite a lot of equity when they take out the loan. But since payments aren't required as long as one borrower lives in the home, and it is a negatively amortized loan there is risk that the loan balance could become higher than the home value over that person's lifetime. The HUD insured reverse mortgage protects the lender from that risk which allows them to lend funds at a very favorable rate. (The current variable rate carries a margin of 2.375% above the one month LIBOR index with a lifetime cap of 5 points above the start rate). The lenders also feel comfortable providing a more favorable loan to value ratio than private reverse mortgages. (A 74 year old gets 60% of the value up to a maximum value of $625,500, younger people get less, older people get more)
Here are other benefits to HUD insuring the HECM (Home Equity Conversion Mortgage)
- A line of credit that grows at the same rate and mortgage insurance charges that is charged on the loan balance (currently about 4% annual rate) Even if the line of credit turns out to be higher than the home value, it is available to the borrower to access. Now that's a smart way to protect yourself against a housing crash!
- A guarantee that funds are available to you no matter what happens to the lender, your home value or the economy.
- Assure that you or your heirs will never have personal liability on the debt. The home alone stands for the debt.
- Requiring reverse mortgage counseling to protect and educate seniors on the product.
So even though you have insurance on your home, it's not the same as mortgage insurance on your loan and understand that it helps YOU!
By: Maggie O'Connell