By Bobbie Sage. Personal Insurance Expert
At many kitchen tables of elderly parents and their children the subject of money is a popular discussion. Usually the discussion is based around how to find more money to help with retirement in some way or to pay off debts so retirement can be more enjoyable or just happen. Along with life insurance options the reverse mortgage is often a product discussed in these conversations.
For those who do decide on a reverse mortgage and start looking into how it works they often are confused as to why they have to pay reverse mortgage insurance.
As many homeowners know, along with homeowners insurance they are required to pay mortgage insurance as a part of their home loan as a protection for the bank if the homeowner defaults on their home mortgage payments. So, it is confusing at first to many as to why they would need to pay reverse mortgage insurance since they are not making home payments and therefore would not default on the home loan.
Let's first briefly look at how a reverse mortgage works to understand why reverse mortgage insurance is needed.
A reverse mortgage is a product that can help elderly homeowners by taking the home equity one has in their home and turning it into immediately usable cash to help pay bills or provide extra money for retirement. The amount of money that one can obtain from a reverse mortgage varies depending on one's age, the home's value, interest rates and fees that are required for the loan. Once the loan is approved the cash can be distributed in many ways to the homeowner such as monthly payments, an equity line, a lump sum or the distribution of cash can also be a combination of these payments.
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One of the factors that determines how much money a homeowner may be able to get from a reverse mortgage is the fees that the homeowner would
need to pay as a part of the reverse mortgage. The reverse mortgage insurance is one of these fees. As we learned earlier, it is often questioned why a homeowner would have to pay reverse mortgage insurance since usually mortgage insurance is required for regular mortgages to protect the mortgage lenders if the homeowner should default. Again, obviously there is no risk of default from the homeowner with a reverse mortgage. There is a default risk though that the mortgage insurance is for and the lender wants protection against.
The reverse mortgage insurance that the homeowner has to pay as part of a reverse mortgage guarantees that the lender of the reverse mortgage will get their full payment. There are a few reasons why the lender may be at risk of not getting their full payment. A common reason is a decrease in the value of the home. Since in a reverse mortgage the lender is paid by the value of the home when it is sold, if for some reason the value of the property decreases then the lender would not get all of their payment and would then use the reverse mortgage insurance that the homeowner paid for upfront in the original loan fees to obtain the rest of their payment.
There are a large number of other factors besides the reverse mortgage insurance that all homeowners should consider and research aggressively before choosing a reverse mortgage product. It is also important to remember that again, a very small percentage of homeowners actually choose a reverse mortgage product and have considered other standard options, such as a home equity loan, to sometimes be a better and less costly choice because of the lower fees involved. The reverse mortgage is a major decision and if it is a product one feels would work best for them, it is important to find a reputable mortgage insurance lender and have all homeowners and other family members available when discussing the product with the lender.