HECM, IMIP, MIP...what do these mean?

Explaining the requirements and vocabulary of the government backed loan.

What does HECM stand for?

HECM stands for Home Equity Conversion Mortgage. A HECM Reverse Mortgage is a loan regulated and insured by the Federal Housing Authority (FHA).

Reverse Mortgages are insured by the government. A major benefit of this is that your home will be protected even if your lender goes out of business or if your loan exceeds the value of your home.

What is Mortgage insurance and why do I need to pay it?

On the HECM Reverse Mortgage program, the government charges mortgage insurance premiums in order to provide the guarantee of a non-recourse loan. If the balance of the reverse mortgage loan exceeds the value of the home when the loan has matured, the mortgage insurance funds will cover the loss incurred on that loan.

What is a non-recourse loan?

A non-recourse loan is a debt that is secured by collateral, in this case, your house. If you default on your loan, the lender cannot seek out further compensation beyond the value of your home, even if the value does not cover the full value of the defaulted amount.

With a non-recourse Reverse Mortgage, you can never owe more than what your home is worth when your loan matures.

For example, you decide to take a lump sum payment of $200,000 and place that in your savings account. You have decided to move, but the value of your home has plummeted, and your loan balance is now more than what your house is worth. The lender keeps your home and that is it. They can't ask you for anything more, not even the $200,000 of equity that you had withdrawn and have in the bank.

What is Mortgage Insurance?

Mortgage insurance is protection for the lender, but also protects the borrower. There is Upfront Mortgage Insurance and Annual Mortgage Insurance, the proceeds of both go into a fund to cover the lender's losses in case the loan amount exceeds the property value, and to insure your loan payments continue in case the lender goes out of business.

What is IMIP?

IMIP is the Initial Mortgage Insurance Premium. This is an upfront premium collected by the FHA when you first obtain your Reverse Mortgage loan. The IMIP charge is a flat 2% premium based on your home's appraised value or the maximum lending limit of $970,800, whichever is less. This fee can be wrapped up in your loan amount.

How much is the Annual MIP?

Annual MIP (Mortgage Insurance Premium) rats are currently 0.5% of the outstanding loan balance, accrued annually and paid for when the loan is due.

To summarize...

A reverse mortgage requires an upfront fee of 2% (of your property value or max. loan limit), and an annual fee of 0.5% of your loan's balance. These fees are added to your loan and are payable when the loan becomes due. The fees protect the lender in case you default, or your home becomes underwater (the amount owed is more than the value), and insures your payments continue in case the lender goes out of business. You will never owe more than your home is worth.