Reverse Mortgage Dictionary
Definitions of Terms

As The Experts Excelling in Service providing reverse mortgages in Minnesota, we are pleased to offer you this comprehensive Reverse Mortgage Dictionary providing you with reverse mortgage definitions of terms commonly referenced during a reverse mortgage transaction.

A Reverse Mortgage is a mortgage that allows a homeowner 62 or older to use the equity in their home to receive cash while continuing to own and live in it without having to make monthly payments.

The following are definitions of terms often used in association with reverse mortgages. For further clarification or assistance, please contact Reverse Mortgages SIDAC.

A B C D E F G H I J K L M N O P Q R S T U V W XYZ

Adjustable Rate
The interest rate on the mortgage that changes generally either monthly, semi-annually, or annually.
Amortization Schedule
An estimate of projections on the loan. These projections are based on the interest rate and the home value appreciation (4%). Actual interest charges and property values projections may vary from the amounts shown on the Amortization Schedule. Available credit will be less than the projected if funds are withdrawn from the Line of credit.
Annuity
A product of insurance companies that provides lifetime monthly income. A separate transaction and not required to be done with a reverse mortgage.
APR
Annual percentage rate measuring the total of the loan costs.
Appraisal
The market value of the home determined by an FHA appraiser using comparable recent sales of similar properties.
Appreciation
The increase of value to the borrower’s home. With the Reverse Mortgage 4% is used for calculations.
ARM
The increase of value to the borrower’s home. With the Reverse Mortgage 4% is used for calculations.
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Borrower

The homeowner(s) doing the Reverse Mortgage.
Broker or Mortgage Broker
A company in the mortgage business who works with various lenders but does not loan the money. Sometimes referred to as an originating lender.
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Cap
See Interest Rate Cap.
Closing
The time the borrowers sign the legal documents for their mortgage.
Closing Costs
The costs charged to a borrower at the time of closing to obtain a mortgage. These include the origination fee, mortgage insurance premium, title insurance, appraisal, survey, attorney fees, settlement fees, recording fees, abstract and title search, document preparation fees. (Click here for closing costs definitions.)

CMT -Constant

Maturity Treasury

The rate for U.S. Treasury Securities used to determine the interest rate for some reverse mortgage programs.
Credit Line
See Line of Credit
Creditor
A person or firm who money is due.
Current Interest Rate
The interest rate actually being charged on the loan.
Current Net Principal Limit
Found on the borrower’s monthly statement, this is the Net Principal Limit as of the date of the statement.
 
Default

Failure to meet the terms of the mortgage or loan. This could mean not paying the property taxes, keeping insurance on the loan, maintaining the property, or repaying the loan when notice has been issued.
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Equity

The value available after debts have been paid.
Escrow
Money set aside or held to be used to pay expenses after the loan has closed. Common escrows include funds for repairs, taxes, or insurance.
Expected Interest Rate
The interest used to determine loan advances (for the HECM it is based on LIBOR SWAP or the 10-year rate for U.S. Treasury Index, plus a margin).
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Fannie Mae

A private company that buys, sells, and invests in mortgages including the HECM. They offer the Home Keeper Reverse Mortgage program. As government-sponsored they are overseen by the federal government.
Federal Housing Administration (FHA)
The part of the U.S. Department of Housing and Urban Development (HUD) that insures HECM Loans.
Federally Insured
The government guarantees the loan.
First Lien Position
The creditor or lender who has the first claim or right to assets before any other creditor or lender. Reverse mortgage lenders need to be in first lien position.
Fixed Rate Mortgage
A mortgage where the interest rate stays the same, or is fixed, during the term of the loan.
Funder or Funding Company
Company who provides the funds for the loans or mortgages.
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Home Equity
The value of one’s home less any debt.
Home Equity Conversion Mortgage (HECM)
The only Reverse Mortgage program insured by the Federal Housing Administration.
Home Equity Loan
A loan using one’s home as collateral.
Home Keeper Mortgage
The Reverse Mortgage program developed and backed by Fannie Mae.
HUD
U.S. Department of Housing and Urban Development.
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Index

A published rate lenders use as a basis for interest charged on a loan.
Initial Draw
The amount used to pay off any current mortgages, liens, or judgments and/or a lump sum paid to the borrower.
Initial Interest Rate
The interest rate charged at the beginning of the loan at closing (for the FHA HECM loan it is based on LIBOR or the one-year rate for the U.S. Treasury Securities, plus a margin).
Interest
The fee charged for borrowing money.
Interest Rate Cap
The maximum limit of the interest rate may go up or down on an Adjustable Rate Mortgage. (On a FHA HECM monthly adjustable rate mortgage the cap is 10 points over the Initial Interest Rate; on the annual adjustable rate mortgage the cap is 5 points over the Initial Interest Rate; on the Home Keeper the cap is 12 points over the Initial Interest Rate.)
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Judgment
A court act creating or affirming a debt. For a reverse mortgage lender to secure first lien position some judgments need to be paid prior to or with the reverse mortgage funds.
Jumbo
A loan generally for higher-valued homes.
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Lending Limit
The maximum amount a lender will look at in determining how much will be loaned to a borrower. FHA and Fannie Mae use Lending Limits.
Length of Term

Determines the length of time the borrower receives the proceeds from the Reverse Mortgage.

  • Tenure: Equal monthly payments to a borrower that continues as long as the property is his or her primary residence.
  • Term: Equal monthly payments to a borrower for a specified fixed time period chosen by the borrower. The shorter the term, the higher the monthly payment will be. When the specified term ends, so do the monthly payments.
  • Modified Term or Tenure: Monthly payment plan plus a line-of-credit.
Lender
A company who lends money. They can be a direct lender or an originating lender.

LIBOR
London Inter-Bank Offertory Rate – A rate used for interest on loans including reverse mortgage loans.
LIBOR SWAP
A floating rate used to determine expected interest rates for reverse mortgages.
Lien
A claim or right by a creditor or lender upon property to receive payment or satisfaction of a debt or obligation.
Life Estate
Is a legal procedure granting the lifetime rights to own and live in one’s home while transferring the future interest of the ownership to someone else; the remainder person(s); upon death.
Line of Credit
A credit amount from which the borrower can receive funds at any time and in any amount of their choosing up to the amount available in their line of credit. With the reverse mortgage the amount of the line of credit cannot exceed the Principal Limit. Money in the Line of credit can grow.
Loan
Granting the use of something (money) on condition that it will be paid back at a future date when the terms are met.
Loan Balance
The balance or amount owed on a loan or mortgage.
Lump Sum
An amount of the funds drawn at one time.
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Margin

An amount added to the interest index by the lender to calculate the interest.
Maturity
The time when the loan is due and payable.
Maximum Claim Amount or Lending Limit
The lesser of a home’s appraised value or the maximum loan amount that can be insured by FHA. This is used for determining the maximum Principal Limit for a HECM loan.
Maximum Principal Limit
The maximum amount of the loan available. If the closing costs and any current mortgages, liens or judgments were paid in cash this would be the amount available for use by the borrower.
MIP See Mortgage Insurance Premium.

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Monthly Payment
The amount of money one could receive as a monthly payment. The borrower can determine the amount of the Net Principal Limit they wish to receive each month.
Monthly Servicing Fee
A monthly fee charged to the borrower and paid to the company servicing the loan (servicer) to cover record-keeping and other administrative costs of servicing the mortgage such as sending payments and loan advances, transferring insurance, verifying taxes and insurances are paid, and sending statements. See Servicing Fee Set-aside.
Mortgage
A recorded legal agreement and document by which a sum of money is loaned to a borrower using real estate property as security for repayment.
Mortgagee
The lender of the money in a real estate transaction.
Mortgagor
The borrower of the money in a real estate transaction.
Mortgage Insurance
The insurance that protects the investors against risk and loss. The FHA insurance on the HECM loans keeps the interest rate low and allows more dollars to be loaned than with proprietary programs. With FHA insuring the HECM they guarantee the funds are available for the borrower and that the borrower or their heirs are not personally liable to repay the loan.
Mortgage Insurance Premium
A required charge from FHA to pay for the mortgage insurance. The upfront MIP is .5% of the property value or mortgage lending limit, whichever is less if borrowing 60% or less within the 1st 12 months; 2.5% if borrowing more than 60% within the 1st 12 months. The on-going MIP is 1.25%.  FHA insuring the loan keeps the interest rate low and allows more dollars to be loaned than with proprietary programs. FHA guarantees the funds are available for the borrower and that the borrower or their heirs are not personally liable to repay the loan.
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Net Principal Limit

The total amount of money available to the borrower. Equal to the Principal Limit less any payments to the borrower, any financed closing costs, the servicing fee allocations, any set-asides, plus any partial repayments.
Non-recourse
The loan can only be repaid with the value of the home. There is no personal liability to repay the loan from the borrower or their heirs.
Note
A legal document obligating the borrower to repay the mortgage loan.
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Original Principal Limit

Found on the borrower’s monthly statement, this is the Principal Limit at the time of their loan closing.
Originating Lender
A lender who originates the loan but does not service the loan and may or may not fund the loan.
Origination
The process for starting the loan or mortgage.
Origination Fee
A fee charged to the borrower by the originating lender. This covers the administration fees, processing, underwriting, loan officer’s salary, overhead, etc.
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Payment Plan

The options on how the borrower receives their funds, i.e. Monthly Payments or a Line of Credit.
Point(s)
A percentage point. For example, the cap of the loan is 10 points higher than the interest rate so if the interest rate is 5.6% the cap would be 15.6%.
Principal
The amount of money available or owed as a debt upon what interest is calculated.
Principal Limit
The maximum amount of money available to a borrower. With the HECM reverse mortgage the Principal Limit gradually increases over the term of the loan.
Principal Limit – Shared Premium Factor
The factor representing the difference between the Maximum Claim Amount and a borrower’s Principal Limit.
Principal Limit Protection
Holds the Principal Limit or amount of funds available to the borrower at the time of application reducing the uncertainty of the funds available between the time of application to the time of closing. Does not lock the rate of the loan. It only applies to the HECM.
Property Appraised Value
Market value of property determined by an appraiser (initially may be an estimate of the property value until after an FHA appraisal has been completed).
Proprietary Reverse Mortgage
A program owned and offered by a private company.
 

Rate Lock

An interest rate guaranteed, or locked, by a lender for a specified period of time during the processing of their loan.
Rescission Period/Right of Rescission
A three-day waiting period after the loan documents are signed before the loan is funded. This gives the borrowers time to review the loan documents.
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Servicer

The company who services loans.
Servicing
Administrative functions on a loan such as record keeping, sending payments and loan advances, transferring insurance premiums, verifying taxes and insurances are paid, sending statements, communications, etc.
Servicing Fee
See Monthly Servicing Fee and Servicing Fee Set-aside.
Servicing Fee Set-aside

At the time of closing a calculated amount of money totaling anticipated charges is set aside or withheld reducing the amount available to the borrower. The set-aside amount is not an initial cost of the loan nor does it become part of the beginning loan balance. The borrower is charged a small amount ($30 to $35) monthly for servicing the loan at which time this monthly charge becomes part of the loan balance. Interest is accrued only on the amount when it added to the loan balance. See Monthly Servicing Fee.
Set-Aside
Funds held from the available loan amount. Common Set-Asides include funds for repairs, taxes, or insurance.
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Tenure Advances

Equal monthly payments to a borrower that continues as long as the borrower occupies the property as his or her principal residence.
Term Advances
Equal monthly payments to a borrower for a specified fixed time period. The time period is determined by the borrower. The shorter the term, the higher the monthly payment will be. When the specified term ends, so do the monthly payments.
Total Annual Loan Costs (TALC)
A calculation reflecting the projected annual average cost of financing the loan.
Treasury Rate
The rate for U.S. Treasury Securities used to determine the interest rate for some reverse mortgages.
 
Underwriting

The process where the loan is reviewed to determine it meets the requirements of the lenders, insurers, and investors.
Up-front Premium or Initial Mortgage Insurance Premium
The upfront MIP is .5% of the property value or mortgage lending limit, whichever is less if borrowing 60% or less within the 1st 12 months; 2.5% if borrowing more than 60% within the 1st 12 months.  FHA insuring the loan keeps the interest rate low and allows more dollars to be loaned than with proprietary programs. FHA guarantees the funds are available for the borrower and that the borrower or their heirs are not personally liable to repay the loan.
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To work with someone who provided this Reverse Mortgage Dictionary and knows the definition of reverse mortgage terms, call:

Reverse Mortgages SIDAC
The Experts Excelling In Service
651-762-9648     Toll Free 877-590-9648

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