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Needs dictate reverse mortgage insurance options

By Tom Kelly
Heraldnet.com Columnist

The older couple was absolutely flabbergasted. They had just received their first reverse mortgage payment in the mail when, two days later, they got an offer for additional mortgage insurance.

"We knew that mortgage insurance was a big part of the reverse mortgage deal, but why should we have to worry about more coverage?" Richard Whiting said. "This was something we didn't think we would have to worry about again."

Whiting's concern was understandable. The mortgage insurance premium is a huge part of the upfront costs of a reverse mortgage, a loan designed to allow homeowners 62 and older the ability to tap into the equity in their home without making any payments. This insurance pays the lender in the event the senior outlives the value of his or her home.

What Whiting received in the mail was an offer for mortgage life insurance, apparently sparked by the closing of his loan. Clearly, Whiting did not need mortgage life insurance because his payments were guaranteed to him for the remainder of his life as part of the reverse mortgage package. Needless to say, the solicitation was confusing and caused unneeded anxiety.

Mortgage insurance is offered in a variety of forms for different services and needs. The most common forms are mortgage life, personal (private) mortgage and mortgage unemployment. Let's take a quick look at the differences:

Mortgage life insurance. Mortgage life is commonly offered each time you take out a conforming, "forward" loan. If you purchase mortgage life insurance for the full value of your home loan, your home will be paid off if you die. It is typically offered at closing and then again after you have signed. Its big selling point is that it permits the surviving spouse to stay in the home without using other assets to pay off the mortgage.

Often, the goals of mortgage life can be accomplished by purchasing a term life insurance plan. This option can be less expensive and stays with the individual, not the loan. If borrowers refinance, they must again state that they want mortgage life. Premiums vary depending on age, loan amount and smoker status. Coverage is still available if you did not accept coverage at the time you took out your loan or refinanced it. Ask the lender who wrote your loan, or the person who handles your homeowner's insurance, for details.

Personal (private) mortgage insurance. Because lenders consider borrowers who lack substantial down payments a greater risk than other home buyers, buyers with less than a 20 percent down payment must buy private mortgage insurance, or PMI, to guarantee their loan payments. If the borrower defaults on the loan and the house is sold for less than the bank is owed, PMI will cover the difference. As mentioned, the coverage in a reverse mortgage protects the lender from the possibility of the borrow outliving the value of the home.

PMI is required by lenders; mortgage life is an option. PMI costs differ according to coverage. Typically, all borrowers who take out loans guaranteed through the Federal Housing Administration must pay 2 percent of the loan amount up front and an additional .5 percent of the loan amount annually, which is pro-rated and collected monthly.

Unlike conventional-loan borrowers, FHA borrowers are stuck with PMI payments until the loan is paid off. Most lenders require borrowers to pay 20 percent of their mortgage loan before removing PMI payments. The PMI Act allows homeowners with loans originated after July 29, 1999, and who meet specified requirements to have their PMI cancelled.

Mortgage unemployment insurance. This coverage is the new kid on the market and will pay an individual's monthly mortgage payment, including principal, interest, taxes and any escrow impounds, should the insured become involuntarily unemployed. Variables include the type of job, geographic location and monthly mortgage payment amount. Payments are made directly to the lender or lien holder, not to the individual policyholder.

Approximate premium costs average about 4 percent of the monthly mortgage payment, but the cost can vary greatly depending on the occupation or "insurable position."

For example, if your monthly mortgage payment is $1,000, your mortgage unemployment insurance would cost about $40 a month. The policies can be extremely pricey and may not make sense for some borrowers. Mortgage insurance comes in many packages. Don't accept any insurance - or service - until you know exactly what it provides.

Tom Kelly hosts "Real Estate Today" from 11 a.m.-noon, Sundays on 710 KIRO-AM. Send questions and comments to news@tomkelly.com.



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