Reverse mortgages allow seniors to access the home’s equity to create lifetime guaranteed income or to pay off existing mortgages without ever having to pay a monthly payment.
FHA mortgage insurance protects both the lenders and the homeowners who take one out. Most reverse mortgages are HECM reverse mortgages (the ones insured by the FHA). Something like 98% of the market is FHA reverse mortgages.
FHA also makes the guarantee that you or your beneficiaries will never owe more than the home is worth.
Those benefits come at a cost to seniors looking to get an HECM reverse mortgage. The Federal Housing Administration is the one who monitors and guarantees the program (FHA has been around since the 1930’s). This FHA insurance is what assures you that no matter what happens to the economy or to your particular lender you will receive the agreed upon income from the lender. It is worth mentioning that this program (HECM reverse mortgage) is one of the most highly regulated programs since it benefits seniors (this is good news). Should the value of the home decrease, while the mortgage balance exceeds that value, FHA insures you and your heirs that they will make up this difference when the home goes for sale.
The MIP (mortgage insurance premium) is financed into your loan, so it is not like you need to write a check for this every month. The payment for the MIP to FHA comes from the equity in your home automatically.
FHA MIP Costs
The upfront MIP will be .5 percent or 2.5 percent, depending on your disbursements. .5 percent reflects borrowing under 60% of the available equity whereas 2.5 percent is charged should you take out more than 60%.
Throughout the life of your loan, you are going to be charged an MIP fee of 1.25% yearly of the mortgage balance paid in 12 monthly installments. This is NOT paid out of your loan proceeds at closing.
The MIP paid at closing is based on the amount of funds withdrawn during the initial year.
MIP fees are a part of every reverse mortgage. They cannot be negotiated, so it is a cost you have to factor into the loan. Realize that this will reduce the amount of equity available in the future, unless home price appreciation greatly offsets the 1.25% yearly charge. Should home value go up by 4-5% a year for your home MIP fee will simply be a reduction of that growth (that is one way of looking at it).
Private reverse mortgages may not have an MIP but those are private loans and also they won’t have the guarantees in place so are more risky (and rare in 2014 there aren’t too many lenders offering private reverse mortgages).