Taking out a reverse mortgage can give qualified older homeowners a way to keep living at home by turning their equity into cash. If you get the most common type — a home equity conversion mortgage — expect to pay for reverse mortgage insurance.
Reverse mortgages are complicated loans. Understanding how reverse mortgage insurance works, and why it’s important, is a key step toward getting a reverse mortgage:
- What Is Reverse Mortgage Insurance?
- Is Reverse Mortgage Insurance Necessary?
- Types of Insurance Premiums for Reverse Mortgages
- Pros and Cons of Reverse Mortgage Insurance
- How To Get Reverse Mortgage Insurance
- Reverse Mortgage Insurance FAQ
- The Bottom Line on Reverse Mortgage Insurance
What Is Reverse Mortgage Insurance?
Reverse mortgage insurance reimburses the lender for its losses if an insured home sells for less money than the homeowner owes on it when the loan comes due.
A reverse mortgage lets older homeowners borrow a percentage of their home’s equity while continuing to live in it. Instead of the homeowner paying the lender and reducing the principal owed, the lender pays the homeowner and increases the principal owed.
The loan is secured by the value of the home. When a reverse mortgage borrower no longer lives in the home — meaning they’ve moved out, sold the home, or died — the loan balance must be repaid. This is done most often by the owner, their estate, or the lender selling the home to recoup the loan balance.
Home equity conversion mortgages are nonrecourse loans, which means lenders cannot seek compensation for losses from other assets the borrower may own. If the home sells for less than the balance of the HECM, the lender will take the full amount of the sale, and reverse mortgage insurance will cover the rest.
In protecting the lender against losses, reverse mortgage insurance is good for borrowers because it reduces lenders’ risk and makes issuing reverse mortgages more attractive for them.
“The balance on a reverse mortgage grows over time, unlike a traditional mortgage,” says Isaiah Henry, CEO of Seabreeze Management Company, a property management firm in Aliso Viejo, California. “This (mortgage insurance) protection protects the borrower from owing more than the home is worth once the reverse mortgage loan reaches maturity.”
Is Reverse Mortgage Insurance Necessary?
Insurance is required on HECMs, which are regulated and backed by the Federal Housing Administration. Because most reverse mortgages are HECMs, the vast majority of loans have some reverse mortgage insurance requirements.
Proprietary reverse mortgages are similar loans offered by private lenders without FHA backing. They might not require insurance, but lenders may charge borrowers a higher interest rate to compensate.
Types of Insurance Premiums for Reverse Mortgages
HECMs require two types of mortgage insurance premiums: upfront and ongoing.
Upfront mortgage insurance premiums
To close on your loan, you’ll have to pay an upfront reverse mortgage MIP. This will be part of the closing costs, alongside the origination fee and other fees.
For an HECM, the upfront mortgage insurance premium will be 2% of the loan amount. For example, if you get an HECM with an initial balance of $50,000, then the upfront premium will be $1,000.
Ongoing mortgage insurance premiums
Over the life of your loan, you’ll have to pay ongoing MIP for your reverse mortgage to keep the insurance policy active.
For an HECM, the ongoing cost is 0.5% of the outstanding balance annually. For example, if your outstanding balance is $100,000, then the ongoing insurance costs will be $500 annually.
Since insurance is not required for non-HECM reverse mortgages — which are a minority of reverse mortgages — the cost of such a policy is difficult to pin down. Requirements and rates will vary by lender.
Pros and Cons of Reverse Mortgage Insurance
Reverse mortgage insurance offers a lot of benefits, but it’s also important to know the drawbacks.
Advantages of reverse mortgage insurance
- Keeps costs low. Lenders know that mortgage insurance protects them from losses in the event that your home’s value declines. That means they don’t need to charge higher origination fees or interest rates to compensate for the risk.
- More willing lenders. Mortgage insurance also helps increase the number of willing lenders in the market. The lower risk means that more companies are open to offering reverse mortgages.
Disadvantages of reverse mortgage insurance
- High upfront cost. Reverse mortgage insurance on HECMs adds an upfront fee of 2% of the loan’s balance, which can be a significant amount.
- Limits on loan size. To receive FHA backing, which is required for HECMs, the maximum loan balance can’t exceed the conforming loan maximum of $970,800. That could be less than the value of some homes, limiting how much you may be able to borrow with a reverse mortgage.
How To Get Reverse Mortgage Insurance
Getting insurance for a reverse mortgage is a relatively automatic process.
Insurance for HECMs is provided by the FHA. When you take out a reverse mortgage, your lender will handle getting the insurance for you. The only thing you need to worry about is paying the premiums.
For non-HECMs, your lender can advise you on whether reverse mortgage insurance is required and any providers they work with.
Reverse Mortgage Insurance FAQ
It’s important to make sure you understand the different aspects of mortgage insurance when getting a reverse mortgage.
In general, you cannot cancel reverse mortgage insurance. If you have an HECM, then insurance from the FHA is required throughout the life of the loan. The only way to get out of paying reverse mortgage insurance premiums is to pay off the loan.
Reverse mortgage insurance on HECMs is handled by the FHA, which means that shopping around isn’t an option. For non-HECMs, your lender can advise you on acceptable insurance providers.
The Bottom Line on Reverse Mortgage Insurance
A reverse mortgage can help older homeowners, if qualified, take advantage of equity in their later years. Understanding how reverse mortgage insurance makes it possible for lenders to offer HECMs — and how much that insurance costs — can help you decide whether an HECM is right for you.
