Why Reverse Mortgages Need Mortgage Insurance

Many people are finding out that reverse mortgages are able to help them meet their cash flow needs after they start retirement. Instead of being "house rich and cash poor," they find that by tapping into their home's equity, they can often keep their home and be able to live in it as long as they are able to do so. As people look into reverse mortgage loans, though, some may be a little surprised and wonder about things like why they need mortgage insurance. Here are some reasons. 

Mortgage Insurance Ensures Your Money Will Be There 

It is true that a reverse mortgage has more total costs than a traditional mortgage. Mortgage insurance is not added just for the purpose of taking money away. Instead, it is added to ensure that you will have the money you need available when you need it most. 

The first charge for this privilege is a 2% mortgage insurance premium (MIP), and this is taken out right away when the loan is delivered. It is a fixed amount that is based on the total value of your home.

In a regular mortgage, the borrower buys mortgage insurance to satisfy the lender that the payments will be made. It is only required if more than 80% of the value of the home is mortgaged. With a reverse mortgage, however, mortgage insurance is needed to ensure that your money will be there - even if the original lender should go out of business. This guarantee, however, is only with reverse mortgages that originate from the government - Home Equity Conversion Mortgages (HECM's). 

This provides a protection on the equity of your home for your sake. The last thing you would want in a time when the economy is fluctuating and banks are closing, would be to discover that you no longer had sufficient cash flow or are going to lose your home. The MIP is there to ensure that will not happen.

 Mortgage Insurance Protects You from Owing At the End

There is also an ongoing charge to provide you with mortgage insurance protection throughout the period of the reverse home mortgage. This is a monthly charge of .5% and it will continue as long as there is a balance owed. 

The primary purpose of this fee is to ensure that you will not owe any more than the value of your home. Even if the economy becomes worse and the value of your home decreases, it is not possible that you could owe more than what the home is worth. 

Mortgage Insurance Lets You Keep Your Home As Long As You Need It 

This feature enables you to live in your home as long as is necessary, or for as long as you want. It does depend, however, on which options you choose as to the type of payments you are to receive. Of course, the longer you live, the less likely it is that there will be any money left to pass on to your heirs.

Remember that you will not actually be making any payments yourself while you are alive. Instead, they will be paying you while you live in the home. Once you either pass away or move out of the home, then the reverse mortgage will become due and payable.