In the post that I previously shared, I discussed the fees and costs the borrower pays when they originate a reverse loan, and I mentioned the fees were very similar to traditional mortgages with the exception of the Mortgage Insurance Premium.
This insurance fee is quite expensive and gives the reverse loan a reputation for having higher closing costs compared to more traditional loans and I agree. it is expensive, but it is important to understand why it is being charged and how it protects and benefits the borrower and their heirs.
A reverse mortgage or HECM is insured by the federal government and will be repaid in the future regardless of how long the borrower(s) lives or if the property value declines. It has a “non-recourse” feature and that means you can never owe more than the property is worth at the time the loan is repaid.
If for any reason all of the equity has been used over the years and now the loan balance exceeds the value of the property, the borrower and or the estate will not have to pay the difference between the two figures, as the MIP will cover the shortfall.
At the time of the loan application and Closing, the fee is currently 2% of the Maximum Claim Amount and an annual fee for the life of the loan at .50% that is charged upon the loan balance during the time the loan is active.
I don’t want to make my explanation too complicated or confusing, so, for now, I will conclude my comments but will discuss the fee further in my next post and why it’s such a great benefit to the borrower and their heirs.
I will explain what the Maximum Claim Amount is and also give a bit of information about what a “Principal Limit” is and why the “Expected Interest Rate” and not the Note rate is used to calculate the amount of funds an applicant may receive from their reverse mortgage.