Reverse Mortgage Glossary
Reverse Mortgage Definitions of Terms and Concepts
Definition of a Reverse Mortgage
Reverse Mortgage: A type of Federal Housing Administration (FHA) insured reverse mortgage. Home Equity Conversion Mortgages allow seniors to convert the equity in their home to cash. The amount that may be borrowed is based on the appraised value of the home (subject to FHA limits), and the age of the borrower (borrowers must be at least 62 years old). Money is advanced against the value of the home. Interest accrues on the outstanding loan balance, but no payments must be made until the home is sold or the borrower(s) die, at which point the mortgage must be repaid entirely.
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203-b limit The maximum amount of a home’s value that can be used to determine the dollar amount a borrower receives from a federally insured HECM reverse mortgage; varies by county; the name comes from section 203 (b) of the National Housing Act. Currently the maximum homve value limit is $625,500.
Acceleration Clause A stipulation in a contract that allows for the lender to declare a loan due or demand more collateral; only allowable in certain circumstances such as non-payment of taxes or homeowner’s insurance, letting the home go in disrepair or leaving the home permanently.
Adjustable Rate Any interest rate that changes periodically based on published market rates.
The Reverse Mortgage Adjustable Rates adjust monthly and capped at 10 points above the start rate. There are no periodic or annual rate caps.
Annuity A contract (usually designed by an insurance company) that provides cash payments in a specified period of time. When getting a reverse mortgage, borrowers are cautioned to get annuities with proceeds. People sometimes refer to a reverse mortgage as a Reverse Annuity Mortgage or RAM. Receiving monthly payments from reverse mortgage proceeds is somewhat like an annuity, except the home equity becomes the instrument used to provide the monthly payments.
Appraisal The estimated amount of a home’s value based on the market rate or market value. Generally, the higher the appraisal, the more money you will be able to qualify for with a reverse mortgage. A reverse mortgage is based on your age, your home’s value (appraisal), and what county you live in. The appraisal is based mainly on comparable sales in the area and adjustments made based on size, quality, views etc. Appraisal management firms act as a buffer between the lender and the appraiser and selection of the appraiser must be done by these third party firms.
Appreciation Appreciation is the increase in value in a home or any other asset. The more your home appreciates in value while you have a reverse mortgage outstanding, the more equity could possibly be left over for heirs.
Area Agency on Aging Local or regional nonprofit organization that provides information for older Americans on services and programs; usually part of a national network created under the 1971 Older Americans Act (OAA)
Calculator / Reverse Mortgage Calculator A Reverse Mortgage Calculator is a tool that calculates how much money you could borrow with a Reverse Mortgage. They enable you to compare interest rates, costs and other loan terms. Also provided with the calculator is an amortization schedule which projects the future loan balance, growth in the line of credit, home appreciation and remaining equity. Call or send a request to Maggie O’Connellif you would like a customized amortization schedule based on your input of estimated future interest rates, use of funds and making payments back into the reverse mortgage if you choose to make payments.
Cash (Lump Sum Cash Advance) Reverse Mortgage borrowers can receive their Reverse Mortgage payout in cash – a single lump sum. The fixed rate option requires you take all of the available cash as a lump sum at the time you close on your reverse mortgage.Other Reverse Mortgage payment options include: Line of Credit, Tenure, Modified Tenure and Term. Reverse Mortgage payouts can be customized with a mix of different payout options.
Closing Costs: Closing costs on a Reverse Mortgage are the costs a borrower must pay to secure a Reverse Mortgage. These fees may include an origination fee, title insurance, appraisal, escrow or settlement charges, flood certification, credit report and more. The HECM Saver program offers lower fees than the HECM Standard program.
Cash-Out Refinance A refinance transaction where the amount of money from the new loan is greater than the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens.
If there is no existing mortgage, you would have a cash out refinance, or you may leave the available funds in a line of credit.
Closing The finalizing of a mortgage; this is the time when documents are signed and the three day rescission period begins. The reverse mortgage closing process is much the same as a traditional or “forward” mortgage.
Counselor / Reverse Mortgage Counselor The federal government mandates that all Reverse Mortgage candidates meet with an HUD approved counselor before completing a Reverse Mortgage application. The counselor explains the advantages and disadvantages of a Reverse Mortgage and other topics that are discussed during a counseling session.
Credit Line A credit account allowing the borrower to receive money from the lender at the borrower’s intervals and amounts; also called a line of credit. It is a popular feature of reverse mortgages. Many people decide to use a combination of cash up-front and a credit line. The available line of credit increases at the same rate of interest and mip charged on the loan balance.
Deferred Payment Loans A loan that gives the borrower an amount of money which has to be paid back at a certain point in the future; reverse mortgages and student loans both fall into this category. Payments on a reverse mortgage are deferred until death, sale of home or a permanent move.
Depreciation The decrease in value in a home or any other asset, opposite of appreciation.
The Department of Housing and Urban Development (HUD) HUD defines itself as the Nation’s Housing Agency. HUD is the creator of the HECM, the most popular and one of the first Reverse Mortgage products first offered in the late 1980’s.
Federally Insured The HECM Reverse Mortgage product is federally insured by the FHA. A guarantee of the government in the form of insurance; pertaining to reverse mortgages, the loan is backed by the federal government so that the borrow always gets what is promised by the lender.
Fixed Monthly Loan Advances A certain amount of money that is made to a borrower from a lender each month.
Home Equity The appraised value of a home minus any outstanding loans on the home; related to leftover equity.
Home Equity Conversion Mortgage (HECM) A type of Federal Housing Administration (FHA) insured reverse mortgage. Home Equity Conversion Mortgages allow seniors to convert the equity in their home to cash. The amount that may be borrowed is based on the appraised value of the home (subject to FHA limits), and the age of the borrower (borrowers must be at least 62 years old). Money is advanced against the value of the home. Interest accrues on the outstanding loan balance, but no payments must be made until the home is sold or the borrower(s) die, at which point the mortgage must be repaid entirely.
Home Equity Loan An agreement in which a home is used as collateral for a loan. Reverse mortgages are home equity loans as you borrow from the equity in your home.
Housing and Urban Development (HUD) U.S. Federal Department related to housing; The FHA is a division of HUD. Reverse mortgages are sometimes called HUD Reverse Mortgages, meaning it is the FHA insured HECM reverse mortgage.
HECM See Home Equity Conversion Mortgage above
HECM Saver One of the two types of HECM Reverse Mortgage programs available. The HECM Saver was introduced as a new option for seniors looking to reduce the costs of their Reverse Mortgage. HECM Saver Reverse Mortgages offer less money than their standard counterparts, but have a much lower fee structure to compensate.
HECM Standard One of the two types of HECM Reverse Mortgage programs available. The HECM Standard is the original program offered by HUD since the creation of Reverse Mortgages, and offers the largest amount of money of any HECM program, but also entails the largest fees.
Home Equity The value of ownership built up in a home or property that represents the current market value of the house less any remaining mortgage payments. This value is built up over time as the property owner pays off the mortgage and the market value of the property appreciates. If property value decreases or loan is not repaid monthly as with reverse mortgages, you could have less home equity in the future.
Home Equity Conversion Mortgage (HECM) The HECM is the most popular type of Reverse Mortgage. It typically provides the largest size Reverse Mortgage for a typical home. The HECM was designed by the Department of Housing and Urban Development/Federal Housing Administration (HUD) and is federally insured and regulated. The HECM is offered by approved lenders like Financial Freedom, Wells Fargo and others. There are currently two types of HECM Reverse Mortgages: The HECM Standard, and the HECM Saver.
HUD See The Department of Housing and Urban Development.
- Initial Interest Rate The rate that is charged at closing; under HECM it equals the one month LIBOR rate plus a margin. The margin varies by lender and program option and determines profits the lender makes with reverse mortgages. For the fixed rate option, the initial interest rate is the rate that will not change throughout the loan.
Interest Rate Caps Interest Rate Caps are a preset maximum interest rate that may be charged over the life of the loan. The Fully Indexed Rate of the reverse mortgage loan cannot exceed the Interest Rate Cap. The loan may or may not reach this maximum depending on the change in Index Base Rate.
Jumbo Reverse Mortgage Also known as Proprietary Reverse Mortgages do not have mortgage insurance. It allows higher lending limits than HECM reverse mortgages and are not insured by the FHA. Because it is not insured, the interest rates are higher and loan to value (LTV) ratios are lower than HECM’s.
Lending Limits A lending limit is the maximum Reverse Mortgage loan amount that any home would qualify for. Reverse mortgage currently have a single national limit of $625,500. Lending Limits are used along with your age and prevailing interest rates to determine your “Loan Amount.”
Lien A lien is a legal claim against property that acts as security against payment of debts. A mortgage loan is the most common type of lien. All existing liens and mortgages must be paid at the time of closing of the reverse mortgage. If liens are higher than the reverse mortgage is able to pay off, you would need to bring in cash at the time of closing to make up the difference.
Line of Credit A popular payout method for a Reverse Mortgage is a line of credit. The money remains available in the line of credit for you to draw when needed. The advantage of this option is you are not charged interest until you use the money. Other Reverse Mortgage payment options include: Tenure, Cash, Modified Tenure and Term. And, Reverse Mortgage payouts can be customized with a mix of different payout options.
Loan Amount Loan amount is the term that refers to the actual amount you are eligible to borrow with a Reverse Mortgage. The loan amount is determined by the lending limits of the particular Reverse Mortgage product as well as:
- Your age (As you get older, you are eligible for a greater loan amount)
- The prevailing interest rates (Higher interest rates mean lower loan amounts)
Long-Term Care Insurance Coverage that, under specified conditions, provides skilled nursing, intermediate care, or custodial care for a patient (generally over age 65) in a nursing facility or his or her residence following an injury. Many find LTC products expensive or the don’t qualify due to existing health conditions and substitute the reverse mortgage line of credit with the growth feature. It provides a nest egg for the future for care or any purpose.
Lump Sum A single advance for the amount due; in relation to reverse mortgages it’s a loan advance paid at closing.
Manufactured Housing A manufactured home is one that is constructed almost entirely in a factory. The house is placed on a steel chassis and transported to the building site. For a manufactured home to qualify for a HECM reverse mortgage it must be on a permanent foundation, must be built after 1976, cannot be in a flood zone, must be a double wide and other requirements. You must own the land it is attached to and not rented space in a park.
Margin The portion of the interest rate on an adjustable-rate mortgage that is over and above the index rate.
Maturity The point in time when a debt or loan must be repaid. Maturity events for the reverse mortgage are: Sale of the property, death of the last homeowner or non-payment of property taxes, homeowner’s or hazard insurance or not keeping up the maintenance of the home. There may be other violations of the loan agreement and deed of trust that could cause maturity events.
Modified Tenure This is a Reverse Mortgage payout option that combines a line of credit with monthly payments. Other Reverse Mortgage payment options include: lump sum, line of credit, monthly payments, tenure and term. And, Reverse Mortgage payouts can be customized with a mix of different payout options.
Mortgage A debt instrument that is secured by the collateral of real estate property and that the borrower is obliged to pay back with agreed upon payment terms. Mortgages are used to make large purchases of real estate without paying the entire value of the purchase up front.
Mortgage Insurance Mortgage insurance is a policy that protects lenders against losses that result from defaults on home mortgages. FHA requirements include mortgage insurance primarily for borrowers making a down payment of less than 20 percent or to insure the special risks in reverse mortgages. The premium on the reverse mortgage insurance is two percent of your home’s value or the maximum claim amount, whichever is less. There is also an annual premium of 1.25% percent of the loan balance. This is paid to the FHA by the borrower when a maturity event occurs.
- Cash – You receive the payout in full wired into your bank account or check.
- Monthly Payments –Options for monthly payments include: Tenure, Term and Modified Tenure and Term.
- Line of Credit – The advantage of a line of credit over a regular loan is that interest is not charged on the part of the line of credit that is unused, and the borrower can draw on the line of credit at any time that he or she needs to.
Primary Residence A primary residence is defined as the property you occupy for more than 50% of the year. It is the address on your driver’s license, tax returns and other key documents. A Reverse Mortgage can only be taken on a primary residence.
Property Tax Deferral (PTD) A program for seniors the allows property taxes to be deferred. Not allowed in conjunction with reverse mortgages.
Proprietary Reverse Mortgages: Sometimes referred to as Jumbo Reverse Mortgages or private Reverse Mortgages. Because they are not federally insured interest rates are higher and loan to value LTV ratios are lower.
Reverse Mortgage A loan that provides a cash advance from the lender to the borrower against the equity in a home; reverse mortgages do not need to be repaid as long as the borrower lives in the home nor can the mortgage exceed the value of the home.
Reverse Mortgage Calculator A reverse mortgage calculator will show you how much cash you can get from a reverse mortgage. The amount varies based on your age, house value and current mortgage payoff.The amount you can get is based on the younger spouse’s age.
Reverse Mortgage Counseling Required by HUD in order to obtain a HECM reverse mortgage; counselors help borrowers understand their options and provide knowledge and information. The counseling certificate is required before you can start the reverse mortgage loan process.
Right of Rescission The right of a borrower to cancel a loan within three business days of closing or document signing without penalty.
Tenure Option Regarding a Reverse Mortgage, Tenure Option refers to a payout option for your loan. The Tenure Option gives you equal monthly payments for as long as you occupy your home.
Term This is a Reverse Mortgage payout option that pays you equal monthly payments for a fixed period of time. Other Reverse Mortgage payment options include: Line of Credit,Cash, Tenure and Modified Tenure. And, Reverse Mortgage payouts can be customized with a mix of different payout options.
Third Party Closing Costs Costs incurred to process the loan. See Closing Costs.
Total Annual Loan Cost (TALC) The TALC is the average combined annual costs of your Reverse Mortgage loan. This is a useful figure to use when comparing different lender options.