What Is the MIP on a Reverse Mortgage?

A reverse mortgage allows homeowners, typically those aged 62 and older, to convert a portion of their home equity into cash. Unlike a traditional mortgage, it does not require monthly mortgage payments, as the loan balance becomes due when the last borrower moves out of the home or passes away. A significant component of these financial products, particularly Home Equity Conversion Mortgages (HECMs), is the Mortgage Insurance Premium (MIP). This premium is a required cost designed to provide important safeguards for both the borrower and the lender throughout the life of the loan.

Understanding Mortgage Insurance Premium (MIP)

Mortgage Insurance Premium (MIP) is a fundamental aspect of federally insured Home Equity Conversion Mortgages (HECMs), which are backed by the Federal Housing Administration (FHA). This insurance is a mandatory fee paid by the borrower to the FHA. Its purpose is to ensure the stability and reliability of the reverse mortgage program for all parties involved.

MIP serves two primary functions: protecting the borrower and protecting the lender. For borrowers, it ensures that scheduled loan advances will be received, even if the lender experiences financial difficulties or goes out of business. Additionally, it provides a “non-recourse” feature, meaning neither the borrower nor their heirs will ever owe more than the home’s value at the time the loan becomes due and payable, regardless of how large the loan balance grows. This safeguard prevents a situation where the loan balance exceeds the property’s market value.

For lenders, MIP offers protection against potential losses if the outstanding loan balance surpasses the home’s value when the loan is repaid. This coverage allows lenders to offer reverse mortgages with more favorable terms and broader eligibility criteria, knowing that the FHA’s insurance will cover any shortfall. The premiums collected for MIP are deposited into the FHA’s Mutual Mortgage Insurance Fund (MMIF), which is used to back these protections.

Initial Mortgage Insurance Premium

The Initial Mortgage Insurance Premium (IMIP) is a one-time charge associated with a HECM reverse mortgage, paid at the loan’s closing. This upfront fee is a significant part of the overall cost of obtaining the loan. It is typically financed into the loan balance, meaning it is added to the total amount owed rather than requiring an out-of-pocket payment from the borrower at closing.

The IMIP is calculated as a percentage of the home’s appraised value or the maximum claim amount, whichever is less. For HECMs, this percentage is currently 2.0% of the lesser of these two values. For example, if a home is appraised at $500,000 and the maximum claim amount is $1,209,750, the IMIP would be calculated on the $500,000, resulting in a $10,000 premium.

The maximum claim amount represents the highest value the FHA will insure for a HECM. For 2025, this limit is set at $1,209,750. Factors influencing the maximum claim amount include the FHA’s annual limits, the property’s appraised value, and in some cases, the purchase price for newly acquired homes. Since the IMIP is financed, it reduces the amount of available loan proceeds that the borrower can access from the reverse mortgage.

Annual Mortgage Insurance Premium

In addition to the initial premium, a HECM reverse mortgage also includes an Annual Mortgage Insurance Premium (MIP). This is an ongoing charge that accrues over the life of the loan, unlike the one-time upfront fee. The annual MIP is calculated as a percentage of the outstanding loan balance each year.

Currently, the annual MIP rate for HECMs is 0.50% of the outstanding loan balance. This means that as the loan balance grows due to accrued interest and prior MIP charges, the amount of the annual MIP also increases. Similar to the initial MIP, this annual charge is not paid out-of-pocket by the borrower on a monthly or annual basis.

Instead, the annual MIP is added to the principal loan balance each year. This mechanism means the cost accrues and contributes to the overall growth of the loan. The annual MIP continues to be charged for the entire duration that the reverse mortgage is outstanding, until the loan becomes due and payable.

How MIP Affects Your Reverse Mortgage

Both the initial and annual Mortgage Insurance Premiums play a significant role in the overall financial dynamics of a HECM reverse mortgage. Since both premiums are typically financed into the loan balance rather than paid upfront, they directly contribute to the growth of the outstanding loan amount over time. This growth occurs alongside the accruing interest on the loan.

Because MIP is added to the loan balance, it effectively reduces the amount of equity remaining in the home that is available to the borrower. As the loan balance increases due to these charges and interest, less of the home’s value is preserved as equity for the borrower or their heirs. This can mean that upon the sale of the home, the net proceeds available to heirs may be less than if no MIP were charged.

Despite these costs, MIP provides unique and important protections that are integral to the HECM program. The non-recourse feature, guaranteed by MIP, ensures that borrowers or their estates will never owe more than the home’s value, protecting them from market downturns. Furthermore, MIP guarantees that borrowers will receive their scheduled loan disbursements, even if the lender fails. These protections offer a level of financial security not found in other types of loans.