A

Appraisal:

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.

C

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, 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.

E

Equity Sharing:

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.

I

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: The interest rate used to calculate the principal limit. It equals the 10-year Constant Maturity Treasury rate (CMT) 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 or 1-year CMT) plus a margin. Also called Initial Interest Rate.
• Interest Rate Structure
  1. Index: Reverse mortgage interest rates are tied to one index, the Constant Maturity Treasury rate (CMT).
  2. Margin: An amount added to the Index (CMT) 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.

L

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:

The date on which your reverse mortgage is scheduled to close.

M

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 is 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

N

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.

O

Open End Line of Credit:

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

Origination Fee:

A fee is charged by the lender to cover its expenses for originating the loan. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000. Some lenders waive or reduce the origination fees on certain products.

P

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 are available at closing.

Principal Limit Lock:

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

R

Recordation Tax:

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

S

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 was placed on the home behind the reverse mortgage.

T

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 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.