Reverse Mortgage Terms

Reverse Mortgage Glossary

Appraisal:

A formal report that displays the value of a property based on an opinion by factoring 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 are not allowed to access the funds.

Counseling:

Almost mandated by all states for borrowers interested in reverse mortgages, is typically 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.

Initial Principal Limit:

Amount of funds you are eligible to receive from a reverse mortgage prior to deducting closing costs.

Interest Rates

  • 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-year LIBOR or 1-month LIBOR) plus a margin. Also called Initial Interest Rate.
  • Interest Rate Structure
    1. Index: Reverse mortgage interest rates are tied to one index the London Interbank Offered Rate (LIBOR).
    2. Margin: An amount added to the Index (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.

LESA:

Life Expectancy Set Aside. If you do not pass the financial assessment you will be required to set aside a portion of the equity you could borrow in an escrow account. This escrow account pays your taxes and insurance for you. However, once the funds are depleted, you will once again be responsible for paying property taxes and homeowners insurance on your own. This is also optional for borrowers that are not required to set one up.

Line of Credit Growth:

Usually refers to the available line of credit increases over time according to the terms of the loan agreement. This is typically the current interest rate plus the current monthly mortgage insurance premium.

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 mortgage insurance guarantees that if the lender goes out of business, FHA will allow the borrower continued access to his or her loan funds. The MIP also 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. Most reverse mortgages do not have a loan servicing fee.

Net Principal Limit:

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

Non-Recourse Loan:

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 have the ability to make withdrawals similar to a checking account.

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.

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.

Recording:

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.

Subordinated Debt:

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 the home and has maintain all terms of the agreement in taking care of the home and paying taxes and insurance.

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 homeowner or lender against financial loss from defects in title to real property and from the invalidity or unenforceable of mortgage liens. The cost for the policy is typically paid at closing by the borrower and is usually around 1% of the home’s value.