Insurance and Your Reverse Mortgage
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One thing that many seniors looking into reverse mortgages wonder about is insurance. What type of insurance is required and why? Actually, it’s not nearly as complicated as it seems.

Most homeowners, even those without a mortgage, choose to have homeowner’s insurance. This is insurance that will provide you with coverage if your property is damaged, and it also protects you from liability for injuries and damage that occur on your property. Homeowner’s insurance is a wise choice because it provides you with financial protection in case of a disaster.

Naturally, there are exceptions. Generally you need to buy separate policies for flood or earthquake coverage. And regardless of homeowner’s insurance, you will be responsible for any maintenance-related issues yourself.

A standard homeowner’s policy will insure your home itself as well as all the things that you keep in your home. Generally it is a package policy that also covers your legal responsibility for anything that occurs on your property. Think of the proverbial dog that attacks the mailman or the ice-covered sidewalk on which someone slips. Clearly there is good reason to have homeowner’s insurance simply because you own a home.

When you have a mortgage, the issue becomes even more important. All lenders require you to have homeowner’s insurance that is up to date. That requirement is to protect their investment in your home.
When you take out a loan, you have the option of setting up an escrow account with your lender in order to pay for your property taxes and homeowner’s insurance. For many borrowers, they prefer to ensure that these bills are paid without them having to personally remember. Letting your insurance or property taxes lapse is grounds is for any lender to call your loan due – which can lead to very unpleasant outcomes. Many borrowers, however, choose to pay their own taxes and insurance. While this is a purely personal decision, it is important that if you decide not to set up escrow for these bills you are prepared and have a plan for making absolutely certain that your insurance and tax bills are paid in full and on time.

It is not surprising to find that the same home insurance requirement is there for reverse mortgages. HUD has a reverse mortgage program that collects funds from insurance premiums that are charged to borrowers. Seniors are charged two percent of their home’s value up front. This payment plus one half of a percent on the loan balance each year is usually paid by the mortgage company and charged to your principal balance, keeping you from actually making any payments from your own pocket.

The FHA’s insurance on reverse mortgages makes HUD’s program one that is much less expensive for a borrower than a smaller reverse mortgage program run by a private company that doesn’t have FHA insurance. This is worth keeping in mind when comparing reverse mortgage options.

It is well worth paying this mortgage insurance premium. It guarantees that is the lender goes out of business for any reason, the government steps in and makes certain that you have access to your loan funds. In addition, this mortgage insurance premium guarantees that you won’t ever owe more on your loan than the value of your home when your HECM loan is repaid. Clearly, there are advantages to having insurance.

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