As I meet with clients and begin the paperwork to start their new Reverse Mortgage one of the main concerns is how much they are charged for Mortgage Insurance. Along with what does Mortgage Insurance even do for them anyway?
Well, believe it or not, Mortgage Insurance is a vital piece of the Reverse Mortgage puzzle. Its existence makes life better for everyone.
Why Mortgage Insurance?
Because HECM Reverse Mortgages are an FHA product they play a part in the FHA Mutual Mortgage Insurance Fund. This fund makes it possible for banks and lenders to provide us, the consumers, with riskier loans. It ensures the lenders against losses that could potentially bankrupt them. On the Forward side, these benefits allow Lenders to offer mortgage financing with only a 3.5% down payment, poor credit, and low income. On the Reverse Mortgage side, Mortgage Insurance allows Banks to make Reverse Mortgages which in many cases have a high probability of eventually having a higher balance than the value of the home they are borrowed against. So in essence Mortgage Insurance takes the risk out of risky loans.
Let me give a simple example to illustrate how this works. Imagine we have 3 people wanting to do a Reverse Mortgage. All three will pay mortgage insurance which goes into a collective pool of funds. All three loans are set up with the expectation that the balance of the mortgage and the value of the home will equal each other at roughly the age of 92. (92 is not an exact number but from experience, I’ve found this breakeven point is usually somewhere between 90 and 95)
- The first person passes away at age 75. His home has plenty of equity. Therefore when the kids sell the home they pay off the mortgage and retain any remaining equity.
- The second person passes away at age 89. Though the majority of his equity has been used there is still a little remaining which will likewise go to his heirs.
- The third person lives to be 98. His home is very upside down so when the home is sold there is still a large balance that must be repaid. To protect this borrower’s heirs from being responsible for this shortfall, the bank goes to FHA. Then FHA pulls the remaining balance owed from the Mortgage Insurance Fund.
So you see, since we don’t know what the market value for homes will be in 10-30 years or how long people will live, everyone must pay a small portion into the Mortgage Insurance Fund. Thus everyone who participates can receive equal protection and benefit from the program.
If you or someone you love needs a way to live better in retirement please call or email me today.
Reverse Mortgage Specialist
Heritage Reverse Mortgage
435 359 9000
Company NMLS# 1497455 Trevor’s NMLS# 267962