Reverse mortgages are a powerful financial tool for homeowners aged 62 and older, providing a complementary source of income and monthly cash flow. After the reverse mortgage is issued, an additional 0.5% mortgage insurance premium (MIP) is charged annually. This 0.5% is based on the amount borrowed, which is usually significantly less than the initial cost due to the fact that most HECMs only allow homeowners to borrow up to 50% of their home's equity. An annual MIP of 0.5 percent of the outstanding loan balance will also be charged, but this fee will not be deducted from disposable loan income.
Variable-rate reverse mortgages have a rate that is subject to change over the life of the loan, resulting in variable costs. Proprietary reverse mortgages, which are not insured by the federal government, have no limits on what they can charge. Fixed-rate reverse mortgages have a stable interest rate and borrowers receive the proceeds from their loan in a lump sum, rather than in monthly payments. Long-term property costs such as real estate taxes, homeowners insurance and property maintenance must still be paid even though monthly mortgage payments are optional on a reverse mortgage.
These fees apply to a home equity conversion mortgage (HECM), which is insured by the federal government and has more stringent guidelines and fee limits. However, since a reverse mortgage involves taking advantage of the capital that is already in your home, you have the option of including most of these costs in your loan. Proprietary reverse mortgages are not required to charge either UFMIP or MIP, so they could save borrowers money. Since no payments are made during the life of a reverse mortgage, interest is not paid on a regular basis.
A counseling session with a third-party service must be completed at the initial stage of the process to protect borrowers from using more capital than they borrowed in their reverse mortgage. A recent rule change made fixed-rate reverse mortgages less desirable for many borrowers because of new restrictions on loan income.
