Glossary
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Glossary of Terms and Concepts

(In alphabetical order):

Appraisal
Available Principal Limit
Cash or Lump Sum Cash Advance
Credit Line or Line of Credit
Closing Costs
Counseling
Credit Line Growth Rate
Debt Payoff
Department of Housing and Urban Development (HUD)
Estimated Home Value
Expected (or Qualifying) Interest Rate
Federally Insured
Home Appreciation
Home Equity
Home Equity Conversion Mortgage (HECM)
Index Base Rate
Initial Interest Rate
Initial Mortgage Insurance Premium
Interest Rate Cap
Lender
Lending Limits
Lien
Loan Amount
Margin
Maximum Principal Limit
Monthly Service Fee
Mortgage Insurance
Net Principal Limit
Origination Fee
Payout Options
Primary Residence
Service Fee
Service Fee Set-aside
Tax and Insurance Set-aside
Tenure
Term

Appraisal – assessment of a home’s value after an approved appraiser’s in-person inspection of the home’s condition.

Available Principal Limit – Maximum Principal Limit minus the Service Set-aside.

Cash or Lump Sum Cash Advance – a type of payment received at loan funding in a single payout.


Credit line (also known as Line of Credit) - loan funds available for you to request on an as-needed basis.  You pay interest only on the funds you withdraw for use.

Closing Costs – costs the homeowner(s)/borrowers pay in order to secure a Reverse Mortgage.   Some of these costs, such as counseling and the appraisal fee, may be paid directly by the borrower, prior to loan funding, often called “out-of-pocket” expenses.  Other costs may include but are not limited to escrow fees, title insurance, notary fees, credit and flood reports, courier fees, recording fees and the loan origination fees.
  


Counseling – mandated by the federal government for all Home Equity Conversion Mortgages (HECM); All prospective Reverse Mortgage candidates must meet with an unbiased HUD- approved counselor before completing a Reverse Mortgage application.



Credit line Growth Rate – the rate at which a credit line grows larger; the credit line grows because you are getting older and therefore eligible for a greater portion of your home’s equity.

Debt Payoff – loans funds that you are using at closing to pay off any prior debt on your home.  See Lien.

Department of Housing and Urban Development (HUD) – the federal agency that oversees the Reverse Mortgage HECM program.

Estimated Home Value – the estimated value of your home at closing.

Expected (or Qualifying) Interest Rate – the interest rate used to determine your loan advances.

Federally Insured – the federal government insures HECM loans, which means that they guarantee payment of any loan default to the homeowner/borrower or to the lender.



Home Appreciation – the annual average rate at which your home’s value grows.

Home Equity – the value of your home based upon its market price/appraised value minus any liens against your home.

Home Equity Conversion Mortgage – designed by the Department of Housing and Urban Development (HUD) and Federal Housing Administration (FHA), this type of Reverse Mortgage is federally insured and regulated;


Index Base Rate – the interest rate of the publicly published financial index upon which the fully indexed rate is based.

Initial Interest Rate – the interest rate charged when the loan begins.

Initial Mortgage Insurance Premium – the upfront HECM mortgage insurance premium, currently set at 2% of the lending limit.

Interest Rate Cap – the rate that your adjustable interest rate can never exceed over the life of the loan.

Lender – the entity that makes the Reverse Mortgage available to you.  Lenders must be approved by HUD in order to offer the HECM loan, and must strictly comply with HUD guidelines.    Lenders have relationships with brokers who are authorized to sell their loan products.  Brokers can represent multiple lenders and may therefore identify the best loan for your specific situation.

Lending Limits – the cap on value used to determine loan proceeds available to a homeowner.  This limit is now set nationally at $625,500.  (historically limits were set by county). Lending limits are used along with your age, the appraised value of the property and qualifying interest rates to determine the loan proceeds available to you.

Lien – a legal claim on a property for payment of debt; a mortgage or equity line is the most common type of lien.

Loan Amount – the monies you are eligible to borrow.

Margin – the fixed rate added to the index base rate to establish the fully indexed rate.  For example, if the lender adds a 2 point margin to the LIBOR rate, then the LIBOR rate at .5 (for this example only) plus a 2 point margin would equal a 2.5 fully indexed rate.

Maximum Principal Limit – the greatest amount of cash you could get in a single lump sum at closing if you pay all loan fees in cash.

Monthly Service Fee – the monthly charge for servicing your loan after closing.

Mortgage Insurance – required for all HECM loans by HUD and is non-negotiable under the loan program.  An upfront mortgage insurance premium is required at loan funding as well as an ongoing monthly premium added via the loan interest rate.  The mandatory insurance protects both the homeowner and the lender.
 
Net Principal Limit – Principle Limit minus Service Set-aside, Origination Fee and Other Financed Costs.

Origination Fee – fee charged by the lender for making the loan available to the borrower (processing and underwriting the application and funding the loan).

Payout Options – loan proceeds can be received in a variety of ways including:  cash/lump sum, tenure, term, line of credit, or combinations thereof.

Primary Residence – the property you occupy for more than 50% of the year.    Only a primary residence can qualify for a Reverse Mortgage.

Service Fee – monthly charge that covers the cost of maintaining the loan, including but not limited to responding to requests for loan proceeds, changing loan payment selections, record keeping and preparing monthly statements.  Service Fees have not been used in NEW loans for many years.  But older loans may still contain provisions for service fees.

Service Fee Set-aside – a pool of money “set aside” from loan proceeds to cover the future costs of monthly service fees charged to the loan.  Borrowers do NOT pay interest on this set-aside pool but cannot access the monies during the life of the loan.  As noted above, Service Fee provisions are not currently used in new loans, but may still exist in older loans.

Tax and Insurance Set-aside – a pool of money “set aside” from loan proceeds to cover future costs of property tax and homeowner’s insurance.  Homeowners can elect to pay taxes and insurance this way OR can self-manage the payment of these charges.

Tenure – a type of payment from loan proceeds giving you an equal monthly payment for as long as you occupy your home.

Term – a type of payment from loan proceeds giving you a requested monthly payment for a requested and fixed period of time.