Mortgage Insurance Premium ("MIP") Explained

MIP is one of the costs involved in a reverse mortgage. For an overview of all of the most usual costs, please review this link.

An explanation of Mortgage Insurance Premium on the HECM reverse mortgage according to AARP follows:

HECM insurance guarantees that you will receive your promised loan advances and not have to repay the loan for as long as you live in your home, no matter:

--how long you live there;
--what happens to your home's value; and
--what happens to your lender.

You pay for this insurance in two parts:

--2% of your home's value (or 2% of the 203-b limit in your area, whichever is less) is charged "upfront" at closing; and
--0.5% is added to the interest rate charged on your rising loan balance.

This two-part mortgage insurance premium (MIP) can be financed with the loan. The MIP also guarantees that your total debt can never be greater that the value of your home at the time the loan is repaid. It makes it possible for you to keep getting your monthly loan advances or growing creditline as promised even if:

--you live much longer than others your age;
--your home's value grows very little, not at all, or declines, or;
--your loan balance catches up to—and then is limited by—the value of your home.

As a government program, HECM insurance does not make a profit. The premiums paid by all borrowers are used to continue making loan advances to—and limit the amount owed by—the borrowers who live the longest and whose home values grow the least or decline.

But the MIP is a substantial cost. The upfront portion on a $250,000 home, for example, can be as much as $5,000. The cost of the 0.5% added to the interest rate depends on how much money you borrow, when you borrow it, and the interest rate on the loan.

For a 74-year-old borrower living in a $250,000 home in May of 2006 who borrows one-half of the maximum loan amount at closing, the total amount paid during her remaining life expectancy (12 years) could be about $7,800

(This information was taken directly from AARP’s website. The link you will find this on is here: http://www.aarp.org/money/revmort/revmort_federal/a2003-03-21-whatarecosts.html.)