A straight-forward explanation of some complex reverse mortgage terms
This glossary of terms can help you clearly understand reverse mortgages throughout your loan research, application, closing, and borrowing processes.
A report that states 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.
A service provided by an independent third-party, typically approved by the U.S. Department of Housing and Urban Development, to make sure the borrower fully understands the reverse mortgage and reviews alternative options, prior to application. Mandatory for the HECM program and in certain states for all types of reverse mortgages.
A feature offered in proprietary reverse mortgages that allows a borrower to receive more funds, or pay a lower interest rate, in exchange for giving up a percentage of the home’s future value. No longer offered in any reverse mortgage programs.
Initial Principal Limit
Amount of funds you are eligible to receive from a reverse mortgage before closing costs are deducted.
Expected Interest Rate: The 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: The 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. 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.
Line of Credit Growth Feature
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 that is equal to a small percentage of the maximum claim amount, plus 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
Net Principal Limit
Amount of funds you are eligible to receive at closing after loan costs have been deducted.
A feature that limits the amount owed by the borrower, heirs 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.
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.
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.
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.
A special assessment for recording a mortgage lien. The tax is typically paid at closing by the borrower.
Servicing Set Aside
Amount of funds estimated at closing that 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.
A lien placed on the home behind the reverse mortgage.
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.
A type of insurance policy that protects a homeowner or lender 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.