FHA Legislation Creates Insurance for HUD Reverse Mortgages
Nobody really knows for sure just what piece of FHA legislation created insurance for HECM reverse mortgages, but whoever thought of putting it in the program is a smart one. You can look up the HUD Handbook 4235 to see a very specific provision on this insurance.
Reverse mortgages allows elderly seniors who are at least 62 years old to take out a loan against their home equity. Unlike typical mortgages where the borrower has to make monthly payments, with reverse mortgages, the payment is deferred until the owner dies, moves out, or the house is sold. It is easy to pinpoint the deferred payment as the cause of the great popularity of reverse mortgages.
As with any kind of loan, there are closing costs associated with reverse mortgages. Interest rates, too, are determined by benchmarks – the 10-year T-Bill rates or the LIBOR index. The piece in the legislation puzzle that is making the FHA's reverse mortgages as popular as they are can be described in two words: FHA insurance. This insurance is what saves you in case your home's sales proceeds fall short in repaying the loan (principal plus interest rates and associated costs).
HUD-FHA insurance for reverse mortgages is known as the Mortgage Insurance Premium (MIP). You will find that the MIP is actually a required cost in the closing of reverse mortgages. This is in addition to the loan's origination fee and other closing-related costs. At the start the MIP is equal to 2% of the loan. During the second year and the succeeding years, the MIP falls to 0.5% of the loan balance.
As far as reverse mortgages are concerned, the HUD-FHA legislation requires that the insurance be used for:
- Paying the reverse mortgage lender in case the sales proceeds or refinancing of the house is not enough to cover the balance of the loan. When this happens, FHA claims the insurance in order to repays the lender.
- If the company servicing the reverse mortgage files for bankruptcy, the FHA claims the insurance so that the borrower can still access his money.
If you are thinking about taking out a reverse mortgage, you should know that the loan amount that is made available to borrowers is dependent on five factors (again these are indicated in FHA's legislation):
- The property's appraised value, its conformity to FHA-HUD standards for safety and structural design. Liens against property are also considered.
- The prevailing interest rate based on the 10-year Treasury Bill or the LIBOR index.
- The age of the borrower. At all times, the older the borrower, the more money he or she can get.
- The choice of payment method, whether it is lump sum, line of credit, or monthly payments. Interest fees are at their highest when you opt to be paid in a lump sum, while a credit line maximizes your money. Monthly payments are paid out as long as the borrower lives.
- The location of the property. The FHA has different maximum loan amounts from county to county.
The five factors all contribute to the Total Annual Lending Cost (TALC) of the loan.