What is MIP and PMI?

In my previous post I described what IMIP is in regards to Reverse mortgages and that it is one of the fees listed as a Closing Cost for all borrowers.

Let’s pick up where I left off in the earlier post.

The other benefit to paying this insurance premium, is that in the event and if for any reason the Lender who is servicing the borrower’s Line of Credit should cease to exist and or are unable to provide funds to the borrower from their Line-of-Credit, the borrower is protected, because their loan and funds in the LOC are insured by FHA.

Any money left in the borrowers account will continue to be available to them regardless of whether or not the company servicing their loan continues to exist.

The IMIP protects the borrower, their funds in the Line-of-Credit and the heirs to the estate and that’s very reassuring and beneficial to everyone who has a reverse loan and to their family.

Sometimes the consumer is confused about what MIP and PMI are and there is a difference between them.   PMI is used in conventional mortgage financing whenever a borrower will have less than 80% in equity.

This is typically seen when someone is buying a home and coming in with a small down payment.   PMI protects the Lender in the event the borrower ceases to make mortgage payments on their loan and there is a foreclosure.   PMI gives the Lender some protection by having the loan insured against this possibility.

PMI is for traditional financing and IMIP is for FHA government insured loans.

And there you have it.

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Reverse Loan Fees

Fees or “costs” for a reverse mortgage are identical to what the fees are for traditional real estate loans, with a couple of exceptions and I’m going to discuss one of those exceptions in this post.

I discussed this topic previously, but I thought that I would go into more detail about the IMIP that is always charged on FHA loans and just what it is, because it is the most expensive but important fee that is charged on all reverse mortgages.

Reverse loans never have a required mortgage payment and there is no loan term to be concerned about, but the interest that is owed each month on it will compound over the life of the loan and one of the important purposes of the Initial Mortgage Insurance Premium / IMIP is to guarantee that no matter how much is owed when the loan becomes due  ( the death of the last borrower and or the estate selling the home), they can never owe more than the present value of the property.

In other words, if the loan is larger than what the property is worth, the IMIP will pay the difference, not the borrower or their heirs.   They are completely protected and not liable for the repayment of any funds that exceed the current value of the property.

This is referred to as a “Non-Recourse” mortgage.

 

 

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Senior Dilemma

American seniors retain over 6 trillion dollars in their homes and more of them are beginning to use their equity to extend their retirement funds  (Everyone is worried about out-living their savings) by using a reverse loan to leverage their portfolio’s longevity.

Another reason, might be to eliminate an existing mortgage payment and thus free up some extra money each month to be used for other expenses.

But maybe they decide to sell their home instead and take the remaining equity after Broker fees and expenses related to selling it and possibly rent instead of “own”.

What are the costs to the seller if they opt this route?    I’m going to give a very simple example in this post, but obviously it would depend on the sales price, if they are paying off a mortgage and the Broker fee and other miscellaneous expenses related to the transaction.

  • Sales Price:  $450,000 @ 6% Broker Fees   ( Might be less)  = $27,000;  Paying off existing loan $150,000 = $273,000 remaining equity.
  • Now there are the “other” costs associated with the sale of a home.
  • Escrow Fees and Title Insurance Policies  Approx: $1800
  • Repair and any “staging” fees; approx: $2,000 assuming any repairs are minor, etc.
  • Moving expenses.  Local rates can be $25.00 per “mover” and the average cost is $1000 to $2000.  If the move is out of the state then it’s obviously more expensive and can be between $4000 to $8000.   But again, it depends on the amount of items being packed and moved and the size of the home.
  • Surprise expenses:   There is no way of knowing what could happen in the process of selling one’s home.   But it could be more money out of your pocket.  Such as a Buyer wanting you to pay for some of their loan’s Closing Costs.
  • Hassle and stress factor?   It’s impossible to determine the “costs” of the amount of stress just trying to organize, pack, toss and find a new home to live in.
  • And where?   Going to rent or buy?

So if we deduct the estimated costs associated with our fictitious Seller and deduct it from the equity they have leftover after paying the Broker to List and sell their home, they would have somewhere in the “middle” of $260,000 and $245,000 left over after the entire, frustrating experience ends.

Now what?   Rent until the money runs out or possibly consider buying another home, but this time use a Reverse mortgage to purchase it.

In the next post, let’s discuss why using a Reverse loan to purchase a property can be very beneficial method to qualify for a mortgage on a new residence.

 

 

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Seniors Don’t Want to Sell Their Homes

In my previous post I shared several reasons why seniors might use a Reverse loan and without being redundant, I won’t repeat those reasons in this one.

If a senior homeowner opts to sell their home and not use a Reverse loan for whatever their goals are, here is what must be taken into consideration.

  • Preparing their home for Listing and doing any necessary repairs and or “sprucing” up the property before it goes on the market.
  • The costs for whatever those repairs and cleaning up might be.
  • Agreeing on a Sales price and Broker fee  ( typically 6%) and entering into a Contract.
  • Allowing strangers to walk through your home that can be disruptive and annoying.
  • Cleaning out years of stuff that have accumulated over time and this can be quite “daunting”.

Now, that’s just the business side of selling a home, but what about the emotional and psychological component?

  • Leaving a home that you have loved for many years and is filled with a lifetime of memories.
  • Possibly leaving behind good neighbors, friends and a community that you are comfortable with.
  • Giving up connections to your Doctors and other professionals who’s services you use to assist with your life.
  • Leaving behind a part of “you” that is ingrained in your home and leaving that part of “you” behind for the rest of your life.
  • Grieving over this experience of leaving…..
  • And the serious question;   “Where will I live and how long will the money I receive from the sale of my home, last”?

Sometimes well meaning family members, think that this is the most logical solution for their senior parents.

But is it?

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Use a Reverse Loan or Sell Your Home?

The first time I ever speak with anyone who’s seeking information about Reverse loans, I always ask them why they are looking into one and how it would improve or change their life.

Most of the common reasons are the following ones:

  • Eliminate an existing mortgage and stop having to make mortgage payments each month.
  • Increase “cash” flow.
  • Home improvements
  • Money for unexpected expenses, especially for care-giving and medical bills.
  • Avoiding withdrawals on savings and investments.
  • Traveling
  • Downsizing and buying a new residence.

If the reason to use a reverse loan is for cost of living expenses and increased cash flow, the funds from it can certainly make a difference in the quality of life for a senior, but what is the other option or options?

Sell their home?  Or possibly rent out a bedroom or two, to family members or strangers?

Most people don’t want their privacy compromised by having strangers living in their home and having to tolerate someone else’s habits and behaviors that may not be compatible to their way of doing things.

Plus, it can be dangerous or at the least a bad experience.

This leaves the other option of simply selling their home, taking whatever money they net after paying Broker fees, home inspection costs and paying off an existing mortgage.

Hopefully they will net enough money to afford rent payments and continue to live on their own until they run out of their funds from the sale of their home.

Let’s discuss this last option in my next post.   Does it make sense?   Is it a good idea?

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