The world of finance is full of twists, turns, and complex terminology. Like other types of loans and retirement tools, the reverse mortgage is an intricate arrangement with many nuances. Deciding to get a reverse mortgage is a big decision and will require you to examine the pros and cons in detail. As you take a deeper look into the world of reverse mortgages, you will likely come across the following terms and wonder what they actually mean. What are these concepts, and why are they important?
Adjustable Rate – A variable interest rate that may rise or fall throughout the life of the loan. Getting an Adjustable Rate HECM can be a flexible option for borrowers who would like an opportunity for growth. Clients can receive monthly disbursements, a lump sum, or keep the money in a line of credit.
Appraisal – A licensed, federally approved appraiser will conduct an assessment of a home based on a house visit and examination of comparable prices from the neighborhood.
Appraised Value – The property’s value as determined by the appraisal.
Appreciation & Depreciation – Appreciation is a rise in property value over time. Depreciation is a drop in property value.
Closing Costs – The total costs required in order to close the loan.
Counseling – All prospective clients seeking a reverse mortgage must attend counseling (conducted by a third party hosted by the Department of Housing and Urban Development). The counselor will discuss the pros and cons of getting a reverse mortgage and inform clients of their other financial options.
Credit Line – Also known as a line of credit, this is a certain amount of credit extended to a borrower. A reverse mortgage line of credit is issued for variable rate loans.
Default – When a borrower does not fulfill the obligations of the loan, the loan may become due and payable.
Disbursement – The process by which a borrower receives the proceeds of their loan. When a loan has closed and is ready to be paid out, disbursement will occur.
Federal Housing Administration (FHA) – A government agency that regulates the reverse mortgage industry. They set the legal standards for reverse mortgages and insure loans made by banks and private lenders.
Financial Assessment – To lower the rate of defaults among clients, the federal government has introduced the Financial Assessment process to identify and assist at-risk borrowers based on their credit history.
Home Equity – The value of a home subtracted by any and all debts on the home.
Home Equity Conversion Mortgage (HECM) – HECM this is the official name for a government-insured reverse mortgage. A reverse mortgage converts the equity in a senior’s home into usable funds.
HECM Fixed – After closing, money is disbursed in one lump sum with a low, fixed interest rate that will remain constant throughout the life of the loan. A HECM Fixed loan is often helpful for those who would like to handle large medical bills, pay off taxes, or eliminate an existing mortgage, though the homeowner is still responsible for paying homeowners insurance, property taxes and insurance.
HECM Line of Credit – This is a versatile, variable rate loan that is an adjustable rate HECM. Borrowers have access to their proceeds as a line of credit. Borrowers who do not withdraw from these proceeds right away may see an increase in these available funds as they grow along with interest rates.
HECM for Purchase – Using this type of reverse mortgage, borrowers can purchase a new home without having to make monthly mortgage payments, though they still pay homeowners insurance, property taxes, and maintenance costs. Seniors can use this option to move closer to family, retire in a warmer climate, or simply experience new surroundings.
Department of Housing and Urban Development (HUD) – HUD is an agency that manages other government affairs such as public housing, community development programs, and the Federal Housing Administration.
The London Interbank Offered Rate (LIBOR Rate) – Libor Rate is an index used by banks and lenders to calculate rate adjustments on adjustable rate loans (such as the HECM Line of Credit).
Life Expectancy Set Aside (LESA) – If a borrower does not have a strong credit history, they may be required to set aside a portion of their proceeds from a reverse mortgage in order to pay for taxes, insurance, and maintenance expenses.
Living Trust – A written legal document that holds a person’s assets in a trust during their lifetime and indicates who will receive those assets upon death.
Loan Balance – The total amount owed on a reverse mortgage. Note that borrowers will never owe more than the sale value of the home.
Lump Sum – A single disbursement of proceeds to the borrower after the loan has closed.
Mortgage Insurance Premium (MIP) – In order to maintain the reverse mortgage’s standing as a non-recourse loan, the FHA requires that borrowers pay a fee for mortgage insurance.
Non-Borrowing Spouse (NBS) – A non-borrowing spouse is not listed on the loan. The NBS may be younger than age 62 and may also remain in the property after the original borrower has passed away. However, the NBS will not be able to withdraw funds from a line of credit once their spouse has passed.
Non-Recourse Loan – If the sale of a home used to pay off a reverse mortgage does not meet the amount owed on the loan, the FHA will absorb the difference in cost.
National Reverse Mortgage Lenders Association (NRMLA) – NRMLA is a professional organization made up of certified HECM lenders, originators, and professionals at the forefront of the industry.
Origination Fee – A fee charged to cover the cost of preparing and processing the loan.
Primary Residence – The home in which a borrower lives for the majority of the year.
Principal Loan Limit – The total amount of money a borrower can receive from the loan after closing.
Property Insurance – A type of insurance that covers damage to the property. This type of homeowner’s insurance is necessary in order to close all reverse mortgage loans.
Property Lien – A public record on a property indicating that the owner of that property owes money to a creditor. A typical mortgage includes a lien on the property.
Reverse Mortgage Calculator – A tool used to estimate how much money you may be able to receive from a reverse mortgage by inputting basic information (i.e. home value, age, current mortgage value, and location).
Right of Rescission – The right the borrower has to cancel the loan up to three (3) business days AFTER borrower has signed all finalizing documents.