When considering a reverse mortgage, it's important that mature homeowners and their families have a clear understanding about reverse mortgages and how they work. I have provided some information below on how reverse mortgage loans are insured, but please feel free to contact me if you have any additional questions.
The federally-insured reverse mortgage (Home Equity Conversion Mortgages (HECMs)) are insured by the Federal Housing Administration (FHA). FHA requires a Mortgage Insurance Premium (MIP) to be collected at closing and during the life of the loan. These premiums are charged to the borrower's loan balance. The upfront Mortgage Insurance Premium (MIP) is calculated at 2.0% of your home's appraised value or a maximum of $679,650 (the national lending limit cap of $679,650). For example, a home appraised at $275,000 would have a one-time upfront FHA insurance premium of $5,500. The ongoing FHA insurance premiums are .5% (one-half of one-percent) of each month's calculated outstanding loan balance.
This insurance provides the following protections and peace of mind for borrowers and their children:
- The borrower(s) are not required to pay more than the home’s fair market value.
- If the loan balance exceeds the value of the home, FHA reimburses the lender for the difference when the estate sells the home.
- Payments made to the borrower by the lender are insured by FHA. If the lender is unable to continue making payments, the payments would be made by FHA.
- If the loan balance grows and exceeds the home’s present market value, the lender cannot take title. FHA insures that borrowers can live in their home as long as basic loan obligations are met (homeowner’s insurance in force, property tax payments current and the home is maintained in good condition).