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Glossary of Terms

Search for the definition of a particular reverse mortgage related term you’re unfamiliar with through our glossary of terms.

A – F

Appraisal

A report stating an opinion on the value of a property, based on its characteristics and the selling prices of similar properties in the area.

Closed End Line of Credit

A line of credit that you can make prepayments on, but those funds would not be available for future use.

Counseling

A service provided by an independent third-party, normally approved by the U.S. Department of Housing and Urban Development, that will make sure the borrower fully understands the reverse mortgage and reviews alternative options prior to application. It is mandatory for the HECM program and in certain states for all types of reverse mortgages.

Equity Sharing

A feature offered in proprietary reverse mortgage which allows a borrower to receive increased funds, or pay a lower interest rate, in exchange for giving up a percentage of the home’s future value. Equity sharing is no longer offered in any reverse mortgage programs.

G – M

Initial Principal Limit

Amount of funds you are eligible to receive from a reverse mortgage before closing costs are deducted.

Interest Rates

  • Expected Interest Rate
    Used to calculate the principal limit. It equals either: the 10-year CMT or the 10-year LIBOR rate plus a margin.
  • Actual Interest Rate
    First charged on the loan beginning at closing; it equals one of the HUD-approved interest rate indices (1-month CMT, 1-year CMT, or 1-month LIBOR) plus a margin. Actual interest rate is also called Initial Interest Rate.
  • Interest Rate Structure
    • Index: Reverse mortgage interest rates are tied to one of two indexes, the Constant Maturity Treasury rate (CMT) or the London Interbank Offered Rate (LIBOR).
    • Margin: An amount added to the Index (CMT or LIBOR) to determine both the Expected and Actual interest rates. The margin is determined by the loan investor.
  • Variable Rate
    An interest rate that adjusts monthly or annually.
  • Fixed Rate
    An interest rate that remains constant over the life a the loan.

An interest rate that remains constant over the life a the loan.

In some cases, the available line of credit increases over time according to the terms of the loan agreement.

Loan Closing Date

Date on which your reverse mortgage is scheduled to close.

Maximum Claim Amount

The lesser of a home’s appraised value or the maximum loan limit that can be insured by FHA. Used in determining the principal limit.

MIP (Mortgage Insurance Premium)

Under the HECM program, a fee, charged to borrowers, which is equal to a small percentage of the maximum claim amount, with the addition of an annual premium thereafter on the loan balance.

The MIP guarantees that if the lender goes out of business, FHA will step in and ensure the borrower has continued access to his or her loan funds. The MIP further guarantees that when the property is sold to pay back the reverse mortgage, the borrower will never owe more than the value of the home.

Monthly Service Fees

A fee charged by the loan servicer for administering a loan after closing, such as disbursing loan funds, maintaining loan records and sending statements.

N – S

Net Principal Limit

Amount of funds you are eligible to receive at closing after loan costs have been deducted.

Non-Recourse Loan

A feature which limits the amount owed by the heirs, borrowers, or estate, when the loan becomes due and payable to the appraised home value. For the HECM program, non-recourse only applies when the home is sold.

Open End Line of Credit

A line of credit that allows the borrower to withdrawal funds, make payments back to the lender, and then have the ability to make subsequent withdrawals.

Origination Fee

A fee charged by the lender to cover its expenses for originating the loan. Cannot be more than 2% on the initial $200,000 of maximum claim amount and 1% on the balance thereafter with a cap of $6,000.

Prepayment Penalty

Paying off a reverse mortgage early (that is, before the borrower permanently vacates the property). Under the HECM program, there is no penalty for paying all, or a portion, of the loan prematurely.

Principal Limit

The total loan proceeds available at closing.

Principal Limit Lock

A feature that allows borrowers to lock-in the principal limit for a specific period of time.

Recordation Tax

A special assessment for recording a mortgage lien. This tax is typically paid at closing by the borrower.

Servicing Set Aside

Amount of funds estimated at closing which will be needed to service the reverse mortgage over the projected life of the loan. These funds are deducted from the initial principal limit and automatically paid each month to the loan servicer.

Subordinated Debt

A lien placed on the home behind the reverse mortgage.

T – Z

Tenure Payment Option

Fixed monthly loan advances for as long as a borrower lives in a home.

Term Payment Option

Fixed monthly loan advances or payments for a specified period of time.

Title Insurance

A type of insurance policy that protects a lender or homeowner against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. The cost for the policy is typically paid at closing by the borrower.

Next step: Settling a Reverse Mortgage Account


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