MIP is an acronym for Mortgage Insurance Premium. It is the cost of the insurance policy that is purchased at the time of funding an FHA (another acronym) loan. MIP is charged in both forward and reverse FHA loans.
Purpose of MIP
Traditionally this insurance protects the lender against a loss on the loan if the home is foreclosed on and unable to sell for the balance owed. It is all of that and has an additional function in the reverse space. That function is in the event the lender is unable to fulfill it’s obligations to the borrower, FHA can and will step in to fulfill them. For example, if the bank is unable to make the monthly payment to the senior because a natural disaster shut down their servicing center - FHA will step in and make that payment.
In a HECM reverse mortgage MIP protects the lender and the borrower!
Upfront Cost of MIP
2% of the appraised home value or FHA Lending Limit (whichever is less) on a HECM Standard reverse mortgage, ($6,000 on a $300,000 home)
or
.01% of the appraised home value or FHA Lending Limit (whichever is less) on a HECM Saver reverse mortgage, ($30 on a $300,000 home)
Ongoing Cost of MIP
An annual premium of 1.25% of the current outstanding loan balance paid monthly.Mortgage Insurance makes any loan less risky.
Less Risk = Lower Rates
Higher Risk = High rates.
That's why FHA loans have competitive rates even with a negatively amortizing loan like a reverse, or a low down payment program like the traditional FHA Mortgage. That is also why investors will purchase FHA loans - they are protected against loss.
Comments(3)