Mortgage insurance premium (MIP) is paid to FHA in two ways. One is the upfront payment and the other is the annual MIP. The MIP insurance guarantees that the borrower will continue to receive their expected loan proceeds. It also ensures that the borrower, nor the borrower’s heirs will never owe more than the loan balance or the value of the property, whichever is less. The FHA requires a single, upfront MIP to be paid at closing. The MIP will also be assessed (currently at an annual rate of .05%) throughout the life of the loan and will be added to the outstanding balance and remitted to HUD on a monthly basis. Like interest, MIP does not have to be paid out of pocket by the borrower. It can be allowed to accrue onto the loan balance over time.
This mortgage insurance protects both the lender and the borrower. Mortgage insurance makes the HECM (Home Equity Conversion Mortgage) a non-recourse loan, which means the borrower does not owe a shortfall if the value of the home isn’t sufficient to pay off the entire loan balance when the HECM loan comes due.
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