What’s reverse mortgage insurance?

Reverse mortgages provide senior homeowners with an additional source of income to supplement their retirement income. This type of mortgage lets homeowners convert a portion of their home equity into cash. Borrowers also enjoy various safeguards through reverse mortgage insurance.

Borrowers are required to pay reverse mortgage insurance when they take a reverse mortgage loan. The reverse mortgage insurance guarantees that the loan proceeds will be disbursed to the borrower as agreed in the loan agreement. It also ensures that the homeowner or their heirs will not owe more than the home’s appraised value when the loan becomes due.

Reverse mortgages explained

A reverse mortgage allows senior homeowners to tap a portion of their home equity without moving out or selling the home. You can take the payments as a lump sum, monthly payment, or a line of credit, and you won't be required to make loan payments to the lender until when the loan becomes due. The loan interest accumulates over the term of the loan, and you will be required to pay off the loan when you move out, sell the home, or die.

However, while you won’t be required to make monthly loan payments, you must still pay certain reverse mortgage costs before closing and during the loan term. If you are taking a federally-insured reverse mortgage, one of the costs you will be required to pay is the reverse mortgage insurance premium (MIP). The first MIP is a one-time payment made at closing, and the second MIP is an annual premium that is paid to the Federal Housing Administration (FHA).

Reverse Mortgage Insurance

Home Equity Conversion Mortgage (HECM) loans are insured by the FHA, and they require borrowers to pay reverse mortgage insurance. Typically, reverse mortgage insurance premiums are made up of two costs i.e. the Initial Mortgage Insurance Premium and the Annual Insurance Premium.

Initial Mortgage Insurance Premium (IMIP)

IMIP is an upfront cost charged at a flat 2% premium at closing. This cost is based on the lower of the appraised home value or HECM lending limit. As of 2022, the HECM lending limit is $970,800, and it increases to $1,089,300 in 2023.

 Annual Mortgage Insurance Premium (MIP)

You will be required to pay an annual reverse mortgage insurance premium to the FHA. This premium is equal to 0.5% of the outstanding mortgage balance each year, and it is accrued annually. You won’t need to pay this cost until the reverse mortgage falls due.

What does reverse mortgage insurance provide?       

When a borrower pays reverse mortgage insurance to the FHA, they benefit from several protections. These protections include non-recourse loan protection and guaranteed loan proceeds.

Non-recourse protections

A reverse mortgage does not require borrowers to make monthly mortgage payments, and this means that the reverse mortgage balance grows over time until when it becomes due and payable. In some cases, the reverse mortgage balance may be greater than the home's market value.

Non-recourse protection ensures that reverse mortgage borrowers or their heirs will never be required to owe more than the home's market value at the time of sale. If the loan balance exceeds the home's current market value, the excess amount will be paid by the FHA.

Guaranteed loan proceeds

When you get approved for a reverse mortgage, you can receive loan payments as a lump sum, line of credit, or monthly installments. The reverse mortgage insurance guarantees that you will continue receiving the loan payments over the loan term as agreed under the terms of the loan even if the lender goes bankrupt.

What is Homeowner insurance coverage?

When you take a reverse mortgage, you are required to continue paying homeowner insurance during the loan term. Homeowner insurance protects your home from disaster damages to your home or personal belongings. It covers damages due to fire, wind, or snow, but you would need a separate policy for floods or earthquakes.

Homeowner insurance provides the following forms of coverage:

Dwelling

If the physical structure of your home is damaged by an event covered by the policy like fire or wind, the dwelling coverage pays to rebuild or repair your home, and attached structures like a porch.

Other structures

This coverage protects standalone structures on your property such as a garage, deck, fence, or shed. These structures are covered up to 10% of the dwelling coverage.

Personal property

This coverage pays to replace or repair personal belongings that are damaged after a covered peril occurs. Personal property may comprise electronics, jewelry, clothes, furniture, rags, books, and decorations. This coverage is set between 50% to 70% of the dwelling coverage.

Also, some items like musical instruments, jewelry, and electronics may have limited coverage amounts. You can opt to buy additional property coverage based on how much you need to replace all your personal belongings if your home was damaged by a covered peril.

Loss of use

If you are unable to live in your home due to an event covered by the policy, this coverage pays you the expenses you incur like hotel bills, meals, laundry services, and other temporary expenses as you wait for your home to be repaired. This coverage is set at 20% of dwelling coverage.

Liability insurance

This coverage pays for injuries suffered by others or cause property damage unintentionally. For example, if your dog damages your neighbor’s fence or a guest falls on your icy sidewalk and breaks a wrist, liability insurance pays to repair the fence and the medical expenses respectively. However, this coverage does not cover damages or injuries due to intentional harm or criminal acts. Liability insurance coverage ranges from $100,000 to $500,000

Medical payments to others coverage

This coverage makes payments if you cause unintentional physical harm to others outside your household. It covers basic medical expenses without legal complications. Coverage amounts range from $1,000 to $5000.