“FHA Insurance Premiums in a Reverse Mortgage”

by Daniel J Turner NMLS#1016716; Geneva Financial LLC NMLS#42056

Copyright 2020 Daniel J Turner All rights reserved.

 

I’ve heard MANY MANY planners utter those words…”The expenses are extremely high in a reverse mortgage“.

Let’s rationally look at this assertion.

 

What does the insurance cost?

~The Premium is a ONE TIME 2% of the home appraised value capped at $765,600.00; and 1/2 of 1% of the total loan amount per year. (2.5% yr 1), and .05%/yr from yr 1 for the life of the loan.

How is it typically paid?

~As with most mortgage closing costs, they are typically paid with home equity. Occasionally, a Borrower may want to pay for that cost upfront/out of pocket. They would escrow the sum and it can be paid at the close of the loan. No premium payments are required directly from the Borrowers. Rather, as interest accumulates in an IRA? The Reverse program also is a deferred interest and insurance premium product. When the home is sold, or when the title transfers, the loan is paid from the equity, and the surplus is distributed to the Seller in a lump sum from the Escrow company involved with the transfer of title.

***Other than a double mortgage fee (approximately an additional $80.00) Costs for a reverse mortgage are virtually identical to the costs of any other mortgage. Origination fees on conventional mortgages run approximately 2.5% and may (or may not) be capped; Origination fees for a Reverse HELOC are 2% of the first $200,000.00 of the loan amount and only 1% thereafter, capped at $6,000.00. Additionally, Reverse Mortgages are not permitted to charge “points”.

What does the insurance do? 

In (conventional/common FHA loans) the insurance protects the Lender from a Borrower default, and is required on all FHA loans with less than 20% down payment or credit issues.

However, the same FHA insurance plan in a REVERSE MORTGAGE guarantees the safety of the Borrower (regardless of the value of the property), or the market value of the neighborhood, or value of the home, or the value of the debt, the loan continues to provide equity access and/or the right to live in the home without making mandatory repayments while they occupy the home. Typically, FHA insurance protects the Lender. In a reverse? This insurance protects the Borrowers.

It also provides substantial provisions in the contract verbiage between the Borrower and the Lender. Among the many benefit clauses guaranteed by the insurance are: The HELOC cannot be canceled, suspended, or reduced in value for the life of the loan. The loan is guaranteed by the insurance to add new equity to the balance of the HELOC daily at the same rate as the mortgage rate. It provides a multi-combination choice for the Borrowers to withdraw and use their equity AND the right and the ability to change their minds. Often. These choices include a lump sum (and/or complete refinance of their current mortgage debt, and the payments are rendered to be voluntary; An open-ended line of credit that can eventually grow beyond the value of the home, and the HELOC life span is 150 YEARS from the birth date of the youngest borrower, and Monthly income guarantees. These payouts may be for the lives of both Borrowers, or for a fixed term or amount until stopped (Tenure) or until equity is exhausted (Term). An unusual benefit of the tenure and term option is the ability to suspend the payout indefinitely, situationally, or do something else entirely.

Feel free to try that with any of your best SPIA’s.

The FHA insurance is not quite a “unilateral contract” (but very similar) and the Borrower responsibilities make up a very short list. In a unilateral contract (e.g. Life Insurance), the insured has but one responsibility-pay the premiums in full and on time (and maintain a pulse). In a reverse, the “pulse” is also true, but so is primary residency, maintaining the home, and paying for property taxes and home owners insurance. Additionally, it is important to note these clauses are a part of virtually ALL other mortgages. These elements are NOT unique to reverse mortgages.

So (“Planners”), there you have it. The question remains-what do you think is a “fair premium” for such a program? You’re quick to disparage the reverse as being “fee heavy” and “expensive” yet you’ll not offer any suggestions as to what YOU think a fair premium would be.

Additionally? Without the insurance? This would be a very risky program as the insurance does provide substantial, unique, and important guarantees.

Some of you reading this have made similar disparaging comments I’ve stated without ever once considering the value provided for the premium charged. None of you know how to price such a program, yet condemn the product cost dismissively.

As a comparison? Life Insurance for a 62 yr old is approximately 2% per YEAR of the death benefit. How many years go by before a Life Policy even shows a cash value? The Reverse typically does it at the close. It is irrational to declare this insurance program to be “expensive” yet not be able to tell a Client a single thing the insurance would do for them. Yet the FHA Insurance is “expensive”?

That (my friends) is an odd and distorted sense of proportion.