How Safe is Your Reverse Mortgage?
by Jeffrey L. Bangerter
November 05, 2008
The HECM insurance guarantees that you will receive your promised loan advances and not have to repay the loan for as long as you live in your home, no matter:
- how long you live there;
- what happens to your home's value; and
- what happens to your lender.
If you have chosen the Home Equity Conversion Mortgage (HECM) Reverse Mortgage, the Mortgage Insurance Premium (MIP) paid to FHA protects the investor (Fannie Mae) against the risk that your loan balance might at some time exceed the value of the home.
The mortgage insurance premiums on HECMs consist of two types of charges: a one-time premium at closing of 2 percent of your Maximum Claim Amount, and annual premiums of 1/2 percent per year on your mortgage loan balance. This 1/2 percent will be added to your loan balance in twelve monthly installments (1/12 of the 1/2 percent per month).
This charge will appear on your monthly statement. This two-part mortgage insurance premium (MIP) is financed with the loan.
The MIP also guarantees that your total debt can never be greater than the value of your home at the time the loan is repaid.
It makes it possible for you to keep getting your monthly loan advances or growing credit line as promised even if:
- you live much longer than others your age;
- your home's value grows very little, not at all, or declines, or;
- your loan balance catches up to—and then is limited by—the value of your home.
The MIP is a substantial cost.
The upfront portion on a $250,000 home, for example, can be as much as $5,000.
The cost of the 0.5% added to the interest rate depends on how much money you borrow, when you borrow it, and the interest rate on the loan.