Final answer:
Borrowers of a reverse mortgage who withdraw more than 60% of their equity within the first year must pay a 2.5% Upfront Mortgage Insurance Premium (UFMIP) based on the appraised value of the home or the maximum lending limit, whichever is less.
Step-by-step explanation:
When a reverse mortgage borrower withdraws more than 60% of their equity within the first year, they are generally required to pay a higher Upfront Mortgage Insurance Premium (UFMIP). The UFMIP rate for this scenario is typically set at 2.5% of the appraised value of the home or the maximum lending limit, whichever is less. This insurance premium is mandated to protect the lender from the borrower's default and to ensure the continued availability of reverse mortgages for future borrowers.
For example, if the appraised value of the home is $100,000 and the borrower withdraws more than 60% of their equity, the UFMIP would amount to $2,500. It is important for borrowers to consider the implications of taking out large sums in the initial phase of a reverse mortgage, as this can significantly increase the overall cost due to the higher insurance premium.