Dictionary

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 (HECM uses 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 Available credit will be less than the projected if funds are withdrawn from the Line of credit.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 HECM Reverse Mortgage 4% is used for calculations.
ARM	Adjustable Rate Mortgage – a mortgage or loan where the interest rate adjusts or changes.
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Borrower	The homeowner(s) obtaining 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.
Cap	See “Interest Rate Cap.”
Closed-end Mortgage	A mortgage loan in which all sums have been funded at closing.
Closing	The time the borrowers sign the legal documents for their mortgage, finalizing the loan.
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.
Compensating Factors	Factors used to offset one’s low income to meet the Financial Assessment Income Requirement. These could be income of a Non-Borrowing Spouse, reverse mortgage proceeds.
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.
Deferral Period	Period of time following the death of the last surviving borrower/mortgagor during which the due and payable status of a HECM is deferred based on continuing to satisfy the FHA requirements of a Non-Borrowing Spouse. Back to top
Eligible Non-Borrowing Spouse Equity	One who is married to the borrower and occupies the home and has their age used for determining the principal limit or maximum claim amount of the loan. The Eligible Non-Borrowing Spouse may be protected by the Deferral Period. 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).
Extenuating Circumstance	The reason for late payments on debts, For example, death of a spouse, health/medical issues.
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. Back to top
Federally Insured	The government guarantees the loan.
Financial Assessment	The review of a potential borrowers income and credit to ensure the homeowners are willing and able to pay property taxes and insurance over the term of 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.
Freddie Mac	A government-sponsored company that buys and sells mortgages to sell to investors.
Funder or Funding Company	Company who provides the funds for the loans or mortgages.
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.
Index	A published rate lenders use as a basis for interest charged on a loan.
Ineligible Non-Borrowing Spouse	One who is married to the borrower but does not occupy the home and their age is not used for determining the principal limit or maximum claim amount of the loan. Ineligible spouses are not protected by the deferral period.
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.) Back to top
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.
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.
LESA	Life Expectancy Set Aside.
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.
Life Expectancy Set Aside (LESA)	With the HECM, based on the results of the Financial Assessment, the lender may be required to sets aside a certain amount of money to pay for property taxes and property insurance over the term of the loan. The set-aside reduces the amount of loan proceeds available to the borrower.
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. Back to top
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.”
Monthly Payment/Draw	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. The MIP is used to build a pool the FHA draws on to pay claims on loans they have insured.
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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-Borrowing Spouse	Spouse, as determined by the state law where the spouse and borrower/mortgagor live at the time of closing, but is not a borrower on the loan.
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.
Open-end Mortgage	A type of mortgage that allows the borrower to increase the amount of the mortgage principal outstanding at a later time.
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 company’s administration fees, processing, underwriting, loan officer’s salary, overhead, etc.
Payment Plan/Draw 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 5 points higher than the interest rate so if the interest rate is 5.6% the cap would be 10.6%.
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.
Principal Residence or Primary Residence	The dwelling where the borrower/mortgagor and, if applicable, Eligible Non-Borrowing Spouse maintain their permanent place of living and spends the majority of the calendar year. The property is considered the Principal Residence for borrowers and Eligible Non-Borrowing Spouses, who temporarily go to a health care institution for twelve months or less.
Property Appraised Value	A program owned and offered by a private company.
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	A fee to cover servicing a loan. Can be a separate fee or incorporated in the interest rate. 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/draws to a borrower that continues as long as the borrower occupies the property as his or her principal residence and abides by the terms of the loan.
Term Advances	Equal monthly payments/draws 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 fee paid by a borrower to FHA or a private insurer for 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. 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
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651-762-9648 Toll Free 877-590-9648

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