Without the Federal Housing Authority (FHA) insuring Reverse Mortgages, they would not exist in their present form. This is due to the extreme amount of risk that both the borrower and the lender would face with these types of loans without being insured by FHA. Interest rates would be significantly higher, and the amount that could be borrowed would be significantly lower. It would be the only way for a lender to cover risks of loss.
Mortgage insurance covers both the borrower and the lender.
For the lender, if there is a loss, such as the loan balance exceeding the home value, the mortgage insurance protects against that loss. Because of the risk of loss being limited to such a high degree, lenders are much more willing to loan at lower interest rates, as well as loan more money.
For the borrower, the mortgage insurance allows the reverse mortgage to be a non-recourse loan. This means that the borrower, estate and heirs are not responsible for any losses associated with the loan.
There are two forms of mortgage insurance. The first is the initial mortgage insurance premium (IMIP) and the second is the annual mortgage insurance premium (MIP).
Initial Mortgage Insurance Premium – IMIP
The initial mortgage insurance premium is a one-time fee and can be added to the initial loan balance. The initial insurance mortgage premium will be 2% of your max claim amount.
For example, if your home appraised for $300,0000, the initial mortgage insurance premium would be $6,000.
$300,000 x 2% = $6000
Annual Mortgage Insurance – MIP
This is calculated at .5% annually on the unpaid mortgage balance. However, it accrues monthly at .00417% of the unpaid mortgage balance. It is added to the loan balance monthly. The amount that is added to your loan balance monthly grows over time as your loan balance grows.