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Why do Reverse Mortgages have Insurance?

Question from our Reader:

Is it common for Reverse Mortgages to include an additional monthly fee for “Mortgage Insurance”?
What companies do not charge for Mortgage Insurance?

Hi Ronald,

The lenders do not charge for the Reverse Mortgage Insurance; HUD does on the Home Equity Conversion Mortgage (HECM or “Heck-um”) which is an FHA or government insured program. At this time, there are very few proprietary or private programs available that do not require this insurance as most disappeared when the market experienced all the difficulties in 2009 and 2010. The programs that have come out since the collapse of the market are mainly for Jumbo or high balance loans and I think you will find that the cost with the insurance is still typically less than what these programs have to offer.

The government insurance is what makes the program work. It protects borrowers, lenders, heirs and even the folks who buy the securities backed by the loans. Without the insurance, the viability of the program is very questionable and that is borne out by the fact that most of the programs that were not FHA-insured disappeared when the market collapsed and there are very few that have returned and those that have offer borrowers very few options and at higher rates.

Borrowers who do obtain the proprietary programs, typically because of the loan sizes and property values, currently have fewer programs
available to them. I am only aware of 2 proprietary programs at this time, both are fixed rate requiring a full draw of the funds available and both have interest rates in excess of 7% (greater than the HECM rates plus the insurance renewal of 1.25% of the outstanding balance). There are no guarantees on these programs by HUD, so growing balance lines of credit that they can access at later times would not be guaranteed and therefore borrowers would be open to the risk that something might happen to the lender before they accessed all of their funds, causing their line to close prematurely. Therefore, the fixed rate full draw option on the private programs is the only way to ensure that all funds are available to every borrower.

So Ronald, forgive me for taking so long to answer what is a quick question, but the HECM loans plus the insurance are still below the rate that accrues on the proprietary or private offerings that are available and I wanted to be sure you understood that this insurance protects you on future draws as well as gives you the availability of programs that offer a reverse mortgage line of credit, monthly payments, a full draw or a combination of these features instead of just the one lump sum that the private programs offer. If you need the higher balances that the private programs can give, they are the only way to get them but if not, even with the insurance, the HECM program still gives you more options.

Sources:
About Reverse Mortgage Insurance Premiums
HUD.gov
Upfront Mortgage Insurance Premium