running out of money

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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Paperwork Needed for a Reverse Loan

I actually discussed this in a previous post, but to change it up a bit and make it more interesting, I created a short video with terrific music that makes it pretty simple to understand what kind of documents are needed from a borrower.

Of course, depending on their personal situation other items might be needed, especially if the borrower is still working, then pay check stubs and W2’s would be needed and any phone numbers for management companies if the borrower lives in a Condo.

Which is always a good idea, but for whatever it’s worth here is the video.

And please….do call me if you have any questions.



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Reverse Loans for Million Dollar Properties

There are actually two totally different reverse mortgages that are available for seniors to use when they are considering using a Reverse Mortgage to pay off an existing mortgage or simply want additional funds.

Not too many consumers know about the optional “Jumbo” reverse loan that will enable them to receive more of their equity than they would if they used the FHA HECM program, plus it’s less expensive as well.

The FHA Home Equity Conversion Mortgage has a ceiling on the appraised value of a property and it is referred to as the HUD Lending Limit.   Originally this Limit was calculated on a national basis per county, so it varied in the amount of allowable appraised value of a property, county by county with the west coast having the highest limits.

Several years ago HUD eliminated these unfair limits and issued one single amount for the entire country which at this time is $636,150 but I can recall when it was only $362,790 and lower.

It’s considerably higher now, but keep in mind that the actual amount of the reverse loan will use a smaller percentage of the appraised value of the property or the HUD Lending Limit,  ( Whichever is less) than a Conventional loan would use and most often ( Depending upon the age of the borrower) they might receive between 40-70% of the appraised value/Hud Lending Limit.

But if their property is worth 1.1 MM plus, the value will be capped at the HUD Lending Limit and they will not have any of the remaining equity in their property accessible for their use.

This is where the Jumbo Reverse Loan becomes another option, unlocking the rest of the equity in the property to the borrower and enabling them to draw out more money from their home then they could receive under the HECM FHA loan.

I will give the details about this loan in my next post.

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