What Does MIP Mean for Reverse Mortgage?

Reverse Mortgages

A reverse mortgage is a type of home equity loan available to people ages 62 and older who own their homes outright, meaning they owe no money on them. In a reverse mortgage, a lender makes payments to the homeowner, who can use the money for anything. The money doesn't have to be paid back until the homeowner dies, in which case his estate sells the house and repays the loan, or when he moves, in which case he sells the home and repays the loan himself.

Nearly all reverse mortgages are backed by the Federal Housing Administration, or FHA, which provides two guarantees to participating homeowners. First, they will get all the money they have been promised in their loan contract, even if the lender goes bust; and second, if the price of the home declines so that it is worth less than the total amount they have received from the reverse mortgage, the government will pay the lender the difference when the home is sold. FHA gets the money to back up these guarantees by charging mortgage insurance premiums.

FHA administers its reverse-mortgage guarantees through its "Home Equity Conversion Mortgage" program, or HECM. This program offers borrowers two levels of mortgage insurance, called "HECM Standard" and "HECM Saver." Both charge borrowers an annual premium of 1.25 percent of the outstanding mortgage balance, plus an upfront premium paid when they sign the loan contract. With HECM Standard, that initial premium is 2 percent of the "maximum claim amount," which is either the home's appraised value or $650,000, whichever is less; with HECM Saver, it's 0.01 percent of the maximum claim amount. So for a reverse mortgage on a $300,000 home, the upfront premium would be $6,000 with the Standard plan, but just $30 with the Saver plan. Premiums are often identified on loan statements as "MIP."

The obvious question is why any borrower would choose HECM Standard when HECM Saver is far cheaper. The answer is that those in the Standard program are eligible to borrow considerably more money than those in the Saver program. The FHA doesn't provide general comparisons for how much more is available to Standard borrowers, as loan amounts are determined case by case.