Reverse Mortgage Glossary

Reverse Mortgage Glossary

Adjustable-Rate Mortgage (ARM):  A mortgage whose interest rate changes over time based on an index.

Adjustment Date:  The date that the interest rate changes on an adjustable-rate mortgage (ARM).

Adjustment Interval:  On an adjustable rate mortgage, the time between changes in the interest rate, typically one month or one year depending on the index.

Adjustment Period:  The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).

Annual Percentage Rate (APR):  APR is a measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans.

Appraisal:  A professional opinion of the market value of the property.

Appreciation:  An increase in the value of a house due to changes in market conditions or other causes.

Caps (interest rate):  Consumer safeguards which limit the amount the interest rate can change per adjustment and/or for the life of the loan, on an adjustable rate mortgage.

Clear Title:  Ownership of the property that is free of liens and legal questions as to ownership of the property.  Also referred to as “free & clear” title.

Closing: The occasion when a borrower signs the final loan documents, including the mortgage or deed of trust. Also called “settlement.”

Closing Costs:  The costs to obtain a mortgage loan. Closing costs cover any services and charges – such as title search and insurance, appraisals, surveys, credit histories, required inspections, taxes, and recording fees – that are necessary to complete the transaction.

Counseling Session:  Before the homeowner can apply for a reverse mortgage, it is required that they attend a consumer education session with a HUD-approved counseling agency. The purpose of the session is to explain the legal and financial consequences of obtaining a reverse mortgage.

Deed of Trust:  In many states, including Colorado, this document is used in place of a mortgage to secure the repayment of a note.

Department of Housing and Urban Development (HUD): The Department of Housing and Urban Development is the Federal agency responsible for national policy and programs that address America’s housing needs, that improve and develop the Nation’s communities, and enforce fair housing laws.

Equity:  The difference between the market value of a property and the homeowner’s outstanding mortgage balance or other claims against the property.

Federal Housing Administration (FHA):  A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

Good Faith Estimate:  An initial disclosure required by federal law that the lender must provide an estimate of closing costs. This disclosure must be provided within three days of the date of the application.

Hazard Insurance:  A form of insurance in which the insurance company protects the insured from specified losses to the home, such as fire, windstorm and the like.

Home Equity Conversion Mortgage (HECM):   A type of FHA-insured reverse mortgage.  

Index:  A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the London Interbank Offered rate), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Interest:  Consideration in the form of money paid for the use of money.

Lien:  A legal claim against a property as security for payment of an obligation.

Life Expectancy Set-Aside:  This is money that is set aside from the funds available to cover the cost of the property taxes and/or homeowner’s insurance for the expected life of the loan.  

Line of Credit:  A way to receive funds from a reverse mortgage or other loan that allows the borrower to only request the amount they need at the time.  The remaining funds are still available to the borrower for use at a later time.  There is no interest accruing on the unused portion of the line of credit.

Loan Advances:  All funds advanced from or charged to borrower’s account under conditions set forth in the loan agreement, whether or not actually paid to borrower.

Loan Balance:  The outstanding balance of a reverse mortgage loan. Equal to principal plus financed fees plus all accrued interest.                                                                        

Loan Proceeds:  Payments to a borrower through a reverse mortgage.                                                

London Interbank Offered Rate (LIBOR):  A daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market).  This is the index that is used to calculate the variable rate on reverse mortgages. 

Maximum Claim Amount:  The lesser of the appraised value of the property or the maximum dollar amount established by HUD for a one-family residence under Section 203(b)(2) of the National Housing Act. Both the appraised value and the maximum dollar amount for the area shall be as of the date the conditional commitment is issued.

Mortgage:  A legal document that pledges a property to the lender as security for payment of a debt.

Mortgagee:  The lender.

Mortgagor:  The borrower or homeowner.

Mortgage Insurance Premium (MIP) aka Initial Mortgage Insurance Premium (IMIP):  The fee paid by a borrower to FHA or a private insurer for mortgage insurance. In the reverse mortgage program, the MIP protects the lender against the risk that the loan balance might at some time exceed the value of the home. It also protects the homeowner’s assets from claim due to a loss by the lender.

Negative Amortization:  The effect of interest being added to a loan balance when no payments are applied to reduce the balance. The result is a loan that grows larger over time.

Origination Fee:  A fee charged to the borrower to obtain a mortgage loan. It is charged to cover the lender’s costs in preparing the initial loan application and the processing of the loan.

Power of Attorney:  A legal document authorizing one person to act on behalf of another.

Principal or Principal Balance:  The sum of all loan advances made as of a particular date, including interest and mortgage insurance premiums.

Principal Limit:  This term is used to describe the amount available on a reverse mortgage and is determined using a formula set by HUD that factors in the age of the youngest homeowner, the value of the home (up to a maximum value of $679,650), and the interest rate.

Principal Residence:  The property is considered the primary residence of the borrower.

Refinance:  The process of paying off one loan with the proceeds from a new loan secured by the same property.                                                                                                                   

Rescission:  The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

Recording Fees:  Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.                                                                                   

Servicing Fee:  The fee charged to the borrower to cover record-keeping and other administrative costs of servicing the reverse mortgage. This is a flat fee and is added to the outstanding loan balance each month, typically $30 – $35 per month. Note – As of the writing of this guide (August 2015), no companies are charging a servicing fee any longer.  This can change in the future.

Set-Asides:  Loan proceeds that are not allowed to be taken by the borrower and are reserved for a specific purpose such as to pay for property taxes and/or homeowner’s insurance or possibly required repairs to the home. The borrower is not charged interest on these set-asides until the money has been disbursed.

Settlement:  See Closing.                                                                                                   

Tenure Payments:  Monthly equal payments throughout the life of the loan, which are guaranteed until you die or permanently move from the home. 

Term Payments:  Monthly equal payments that are paid out for a specific amount of time.  Note:  The reverse mortgage loan does NOT come due when the payments stop.

Title:  A legal document establishing the right of ownership.

Title Insurance:  A policy, usually issued by a title insurance company, which insures a home buyer or lender against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender’s interests.

Title Search:  A check of title records to ensure that a person is the legal owner of a property and that there are no liens or other claims outstanding on the property.

Total Annual Loan Cost (TALC) rate:  The estimated cost of the loan to you, per year including all closing costs, projected over different time frames.  This is a hypothetical projection, since you won’t pay anything until the entire loan balance is due.

Truth-In-Lending:  A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.

Reverse Mortgage Guide

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