Important Reverse Mortgage Terms

By on October 16, 2018

Before you can determine if a reverse mortgage is the right financial tool for you, familiarize yourself with these important reverse mortgage terms and make informed decisions when you sit down to design a long-term care plan you can afford.

Reverse Mortgage
A home loan that gives cash advances to a homeowner, requires no repayment until a future time, and is capped by the value of the home when the loan is repaid

Acceleration Clause
The part of a contract that says when a loan may be declared due and payable
Appreciation
An increase in a home’s market value (Equity: see below)
CMT Rate
The Constant Maturity Treasury rate, used as an interest rate index in the HECM program
Condemnation
A court action saying a property is unfit for use: also, the government taking private property to use for the public by the right of eminent domain
Deferred Payment Loans (DPLs)
Reverse mortgages that give you a lump sum of cash to repair or improve a home; usually offered by state or local governments
Depreciation
A decrease in the value of a home
Eminent Domain
The right of a government to take private property for public use; for example, taking private land to build a highway
Federal Housing Administration (FHA)
A unt of the U. S. Department of Housing and Urban Development (HUD) that insures HECM loans
Federally Insured Reverse Mortgage.
Fixed Loan Advances
Payments (made to a borrower, or to another party on behalf of a borrower) each month
Home Equity
The value of a home, minus the total amount owed on it and the cost of selling it
Home Equity Conversion
Turning home equity into cash without having to leave your home or make regular loan repayments
Home Equity Conversion Mortgage (HECM)
The only reverse mortgage program insured by the Federal Housing Administration (FHA).
Home Value Limit
In the HECM program, the largest home value that can be used to determine a borrower’s loan advances
Interest Rates

  • Expected Interest Rate is used to calculate the principal limit. It equals either the 10-year CMT or the 10-year LIBOR rate plus a margin.
  • Actual or Initial Interest Rate is the rate first charged on the loan after closing.
  • The Adjustable Rate vary according to an index; may be capped for specified time periods
  • The Fixed Rate is set at closing and is fixed for the life of the loan.

203-b Lending Limit
The dollar limit in each county for how much of a home’s value can be used to determine
the amount of money you can get from a federally insured HECM reverse mortgage
LIBOR
The London Interbank Offered Rate, used as an interest rate index in the HECM program
Line of Credit
A line of credit allows the borrower to withdrawal funds, make payments back to the lender, and then have the ability to make subsequent withdrawals.
Loan Balance
The amount owed, including principal and interest; capped in a reverse mortgage by the value of the home when the loan is repaid.
Lump Sum Advance
A single loan advance paid to the borrower at closing
Margin
In the HECM program, the amount added to an interest rate index to determine the initial, current, and expected interest rates
Maturity
When a loan must be repaid; when it becomes “due and payable”
MIP (Mortgage Insurance Premium)
A fee charged to borrowers that is equal to a percentage of the maximum claim amount, plus an annual premium on the loan balance in case the lender goes out of business or when the property is sold to pay back the reverse mortgage. The FHA will step in and ensure the borrower has continued access to his or her loan funds and never owe more than the value of the home.
Non-Recourse Mortgage
A home loan in which the borrower generally cannot owe more than the home’s value at the time the loan is repaid
Origination (Fees)
The process of setting up a mortgage and the costs paid at closing as compensation to the lender for the overall administrative process. Fees 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
Amount you qualify for before service set aside and closing costs. Determined by HUD and
based on your age, current expected interest rates and your home’s value.
Property Tax Deferral (PTD)
Reverse mortgages that pay annual property taxes; sometimes offered by state or local governments
Proprietary Reverse Mortgage
A reverse mortgage product owned by a private company
Right of Recission
A borrower’s right to cancel a home loan within three business days of the closing
Servicing (Fees)
The process of administering a loan after closing, such as maintaining loan records and sending statements and the costs paid as compensation to the lender or agents for making or changing loan advances, transferring insurance premiums, paying property taxes, etc.
Tenure Advances
Fixed monthly loan advances for as long as a borrower lives in a home
Term Advances
Fixed monthly loan advances for a specific period of time
Total Annual Loan Cost (TALC) Rate
The projected annual average cost of a reverse mortgage including all itemized costs

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