Glossary

Please keep in mind these are my answers and may not reflect legal definitions, the opinion of my employer or the general consensus in the reverse mortgage industry.

Accrued interest  

Interest on the debt (money borrowed) to be paid at a later date. With a Home Equity Conversion Mortgage reverse mortgage, that is when the last borrower dies, sells, changes residence or goes into assisted living for 12 consecutive months

Adjustable Rate Mortgage  

This is a mortgage where the rate fluctuates up or down depending on the index and margin.

Amortization Schedule  

With a Home Equity Conversion Mortgage reverse mortgage, the Amortization Schedule shows an example of how the loan may perform. This includes the accumulation of the Mortgage Insurance Premium, interest, and balance owed. It also shows the growth of the credit line, balance owed, and a projection of the homes future value (usually at a 4% increase a year). It is important to appreciate this is not a prediction, but an example only.

Annual Percentage Rate (APR)    

The Annual Percentage Rate (APR) is a calculation designed to show certain closing costs translated into an interest rate. This results in a high rate than usually quoted by the lender. The purpose is to increase awareness of costs to the borrower and encourage greater communication between borrower and lender, as well as to assist the borrower in comparing loans between companies. The APR is not used with adjustable rate reverse mortgages.

Annuity  

An annuity is a financial instrument with a guaranteed payment, usually for life.

Annuitize

With Home Equity Conversion Mortgage reverse mortgages, this describes converting the home equity available to the borrower into a payment for life.

Cap                 

The cap is the limit an adjustable rate can go up or down from the start rate. With Home Equity Conversion Mortgages (HECM) reverse mortgages, the cap is 10% above the start rate. So, if the start rate is 3% and the cap is 10%, the rate can’t go above 13%. However, it is important to understand that there is an addition 1.25% for the Mortgage Insurance Premium charged against the debt a HECM.  So the actual cap on the cost of borrowing is not 13% but 14.25%, because the start rate may be 3% but you have to add the 1.25% for a total of 4.25%

Consumer Finance Protection Bureau (CFPB)  

The Consumer Finance Protection Bureau (CFPB) was recently created to protect consumers in all manner of borrowing including Home Equity Conversion Mortgages. If you have a complaint about anything related to borrowing or servicing of a loan, this is the place you go to complain. http://www.consumerfinance.gov.

Closing Costs

These are the costs associated with closing a mortgage. They can include the appraisal, credit report, flood certification, recording fees, title search, title insurance, closing fees, signing fees, endorsements, origination/points and the Up Front Mortgage Insurance Premium. This is not a complete list of costs and costs can vary from state to state. With Home Equity Conversion Mortgages the borrower has the option of paying these costs at closing or adding them to the loan.

Cohort

A cohort is a group or segment of the population.  So Boomers are a particular cohort of the general population

Comparison Sheet    

With a Home Equity Conversion Mortgage reverse mortgage, the Comparison Sheet shows different ways of doing the loan compared side by side. Usually there are at least 3 products and you should expect at least one to be fixed rate.

Compound Interest  

Compound interest means you are being charged interest on the interest you have borrowed.

Cost of Living Adjuster   

Cost of Living Adjuster is the way I describe the growth of the credit line with a Home Equity Conversion Mortgage reverse mortgage. Because it grows at the same rate of interest (plus MIP) compounded monthly on the debt, the growth of your credit line is tied to the cost of the money, not the value of the house.

Counseling 

With Home Equity Conversion Mortgage reverse mortgages, independent counseling by a HUD certified counselor is required as part of the mortgage application process. The counselor’s role is to make sure that you are making a safe decision, that the loan will accomplish what you expect,that you understand all your options as well as the consequences of having a reverse mortgage, and to provide you an opportunity to discuss things with someone other than a commission salesperson. In many states and with many lenders, the counseling is required before you can apply.

Credit Line

A credit line or equity line is that portion of your home’s value the lender has promised you can borrow. In a sense, it is like writing a check against the value of your home.

Dead Equity

Dead equity is a term used to describe the wealth that is trapped in your home.  The term means that the equity is just lying there and not an active part of your wealth management strategy because you cannot access it.

Demand note 

A demand note is a loan which has reasons the lender can require payment on the debt before the loan is due. A Home Equity Conversion Mortgage is a demand note because it comes due when the last borrower dies, relocates or goes into an assisted living facility for 12 consecutive months.

Discharged 

When a mortgage is paid off, it is discharged meaning the debt is no longer owed and the mortgage is no longer in force.

Dodd-Frank Law

This is the law that most recently regulated banking, including practices in the mortgage industry

Down Payment  

A down payment is money the buyer puts down to buy a property. On a $100,000 home if the lender is providing 80% than the other 20% or $20,000 is the buyers down payment.

Draw  

With a Home Equity Conversion Mortgage reverse mortgage if you take a credit line the lender is promising you can borrow money in the future. As you request money you are “drawing” against the mortgage or borrowing some of the money committed to you.

Draw Request 

A draw request form is used to get money from your Home Equity Conversion Mortgage credit line. Usually a draw request form comes each month with your mortgage statement. When you want money, you simply fill out the form (all borrowers must sign it) and you send it into the lender. The money should be direct deposited into your account within 3-5 days.

Due date 

The due date is the date the mortgage must be paid back.

Equity 

Equity is that portion of your home’s value that is not encumbered by debt.  So if you have a $100,000 home with an $80,000 mortgage, the remaining $20,000 above the debt is your equity. Equity loans allow you to borrow that money which is not already mortgaged.

Equity Line   

An equity line or credit line is that portion of your home’s value the lender has promised you can access by borrowing. In a sense, it is like writing a check against the value of your home.

Expected Interest Rate 

The Expected Interest Rate is the rate the lender uses on a Home Equity Conversion Mortgage reverse mortgage as part of the calculation that determines how much of your home’s value you can access from the beginning of the loan.

Federal Housing Administration (FHA)

The Federal Housing Administration was created under Franklin Roosevelt and is a part of the Department of Housing and Urban Development (HUD). Its purpose is to promote home ownership in American and it does this by providing mortgage insurance to various types of mortgages including Home Equity Conversion Mortgages. It is not an entitlement program and has to be self-sufficient by law. HUD’s costs are carried entirely by the borrowers that benefit from its programs.

Financial Assessment 

Financial Assessment with Home Equity Conversion Mortgages (HECM) reverse mortgage is a way of analyzing a borrower’s ability to afford costs of homeownership, like property taxes and hazard insurance, after getting a HECM. If it appears the borrower may have difficulty affording the costs of home ownership in the future, part of the available funds may be set aside in an escrow account for the purpose of paying property taxes and home insurance in the future, should the homeowner fail in this obligation. In some circumstances, this could mean the loan could be denied.

Fixed rate

A fixed rate means the interest rate never changes throughout the life of the loan.

Foreclosure

Foreclosure is when the lender takes action to gain ownership of a home from the borrower. This usually happens because the borrower has failed to comply with some part of the mortgage agreement with the lender.

Forward mortgage  

A forward (or traditional) mortgage is where the interest and part of the principle is paid each month. Over a pre-determined amount of time, the loan is eventually paid off.

Growth Rate 

The growth rate (or Cost of Living Adjuster) is the way I describe the growth of the credit line with a Home Equity Conversion Mortgage reverse mortgage.Because it grows at the same rate of interest (plus MIP) compounded monthly on the debt, the growth of your credit line is tied to the cost of the money, not the value of the house.

Heirs 

Heirs are the people or entity the homeowner designates in his/her will as those who will own the property upon the death of the owner.

Home Equity Conversion Mortgages (HECM)

A HECM is a very specific type of reverse mortgage that is insured through FHA by the federal government. That insurance protects the owner and her/his heirs from owing more that the value of the home at the time of sale. It also protects the credit line so the borrower is assured access to the money even if the bank goes out of business, the home goes down in value, or the borrower has credit problems, so long as the property taxes are current and the home insurance is maintained.

Homeowner  

The person(s) who own the property.The homeowner could also be a trust.

Index

The index for an adjustable Home Equity Conversion Mortgage is the monthly London Inter Bank Offered Rate (LIBOR) as reported in the Wall Street Journal.  So if the index is 1% and the margin is 2%, your interest rate will be 3%.

Interest

Interest is the cost of borrowing charged on the money you owe.

Investor 

Investors or the secondary market buy mortgage-backed securities.  The selling of your mortgage to an investor enables the lender to replenish their funds and loan to someone else. The investor cannot change the terms of your mortgage.

Irrevocable trust     

A trust is a legal entity which owns the property in place of an individual. Irrevocable Trusts cannot usually be changed. Their most common use is to protect the property from Medicaid. However, they can also put the property out of the control of the homeowner. It is possible to get a Home Equity Conversion Mortgage reverse mortgage with an irrevocable trust. However, not all lenders work with these, so if you have one make sure and discuss it early on in your conversation as you shop for a loan.

Lady Bird Trust 

A Lady Bird Trust or Living Trust keeps control of the property in the hands of the occupants and donors to the trust during their lifetimes. At their passing, the home goes to the remaindermen or designees without going through probate.  A Lady Bird Trust doesn’t protect the property from Medicaid.

Lender

The lender is the institution that funds (and may service)a loan.The lender does the underwriting of the loan application.

LIBOR

London InterBank Offered Rate is the index used for most adjustable rate mortgages. It is an international index based on the cost of money between banks in London

Life lease   

A life lease is usually a sale of a property in which the owner retains the right to live in the property for as long as he/she lives. These have been misrepresented as reverse mortgages.  With a HECM reverse mortgage, the homeowner retains ownership and control of the property.

Mandatory Obligations   

With a Home Equity Conversion Mortgage (HECM) reverse mortgage, mandatory obligations are those things that must be paid in connection with the closing of the loan.  So closing costs and debts attached to or associated with the property are mandatory obligations. Credit card debt would not be a mandatory obligation because the mortgage lender usually doesn’t require they be paid as part of the transaction.

Margin

The margin is the amount above the index that creates the interest rate the lender charges on an adjustable rate loan. So if the index is 1% and the margin is 2%, the current rate is 3%.

Maximum Claim Amount

With a Home Equity Conversion Mortgage reverse mortgage, the Maximum Claim Amount is usually the home value.  That is unless the home is worth more than the lending limit, currently $625,500.

Mortgage Insurance Premium (MIP)

The MIP is the ongoing cost of the FHA insurance on a Home Equity Conversion Mortgage reverse mortgage. It is 1.25% of the outstanding balance. This is also included in the credit line growth rate calculation.

Mortgage 

The mortgage is a document which secures a loan by attaching it to the property. This assures the the borrower can’t sell the home without paying off the note and getting the mortgage discharged. The mortgage is recorded at the town, city or county offices.

Draw 

With a Home Equity Conversation Mortgage reverse mortgage, if there are funds available in your credit line, you can take it as you need. So instead of the lender sending you the same amount every month, you take the money on demand.

Monthly Statement 

The statement shows how interest is accruing on the debt, what you owe, the amount available in your credit line, and how your credit line has increased (if there are funds available in the line).

Origination Fee  

The origination fee used to be called points, a percentage of the loan charged to get a lower initial rate or margin.  An origination fee was charged by the lender as a premium on the transaction. Now the origination fee can be either or both. With Home Equity Conversion Mortgage reverse mortgages, the origination fee is considered negotiable and can vary from one company to another.

Note   

The note is the terms of the loan in writing.

ProprietaryProducts

In the reverse mortgage business, a proprietary product is a reverse mortgage that is not a Home Equity Conversion Mortgage (HECM). The federal government through FHA insures HECM’s and the rules are usually the same no matter who is offering them. A proprietary product would likely be unique to the lender offering it.

Principle

The amount borrowed, not including the interest and fees. When you make a payment with most loans you pay back first interest and fees before anything is applied to the principle. With equity or credit lines, when you pay back principle that amount returns to the line and can be borrowed again in the future.

Principle Limit

The principle limit is the initial amount of home equity available for the borrowers. This is less than the maximum claim amount or the home’s value.The home value, age of the youngest borrower, and the expected interest rate are factors in the principle limit.

Qualifying Age      

The qualifying age for Home Equity Conversion Mortgage reverse mortgages is 62. That is the youngest a homeowner can be to get a reverse mortgage. There is no upper age limit.

Regular Mortgage 

A regular mortgage is also called a traditional or forward mortgage. This is a loan where the borrower pays down the principle and interest on a regular basis with the knowledge the loan will be paid off in full on a date certain in the future.

Repair set-aside 

A repair set-aside is an escrow fund with a Home Equity Conversion Mortgage reverse mortgage. It holds some of the borrower’s available funds after the loan has closed until repairs required by the lender or HUD underwriting guidelines are completed. The repairs have to be completed in a specified amount of time, say 6 months. After the work is done and verified by the lender, the set-aside is released back into the borrower’s credit line or sent to the borrower if requested. There is usually a small administration fee.

Reverse mortgage

A reverse mortgage is a loan where regular payments are not required. Since you don’t make a monthly payments, the interest and fees owed the lender are added to the debt. This increases the amount owed over time rather than decreasing like a forward mortgage. Since it is the opposite, it is called a reverse mortgage.

Revocable trust

A revocable trust is one where the individual (s) who created it retain certain rights including the right to change or dissolve the trust

Right of Rescission

Whenever you borrower with your home as security, a federal law requires that you have 3 business days to reconsider in case you change your mind. This is called the right of rescission. If you exercise that right you cannot be charged any of the closing costs and the deal is canceled. So, if you closed on a Monday, the loan would come out of rescission on midnight Thursday. This is because the day you sign doesn’t count(nor do Sundays or holidays).

SAGE Scholars Tuition Rewards

This is a program that encourages saving for a child’s college fund in advance.  According to the website*, “Each Tuition Reward point is equal to a $1.00 guaranteed minimum scholarship at any of our member schools.” *https://secure.tuitionrewards.com

Servicing Fee

The servicing fee is a monthly charge by the lender to administer a loan. Often the borrower does not see the fee. It is one of the reasons lenders sell the servicing of a loan. With Home Equity Conversion Mortgage reverse mortgages, the fee can be between $20 and $35. This is considered a negotiable fee and not all lenders may charge it.

TALC 

The TALC (Total Annual Loan Cost) disclosure for a Home equity Conversion Mortgage (HECM) reverse mortgage is designed to show the closing costs as a percentage of the transaction over time. The purpose is so borrowers appreciate that HECM’s deliver the greatest value over the longest time. This can make them more expensive than other options as a short term loan (based on closing costs).

Tenure payment 

A tenure payment is a payment for life. The lender calculates the amount.

Total Annual Loan Cost

The Total Annual Loan Cost (TALC)disclosure for a Home equity Conversion Mortgage (HECM) reverse mortgage is designed to show the closing costs as a percentage of the transaction over time.  The purpose is so borrowers appreciate that HECM’s deliver the greatest value over the longest time.  This can make them more expensive than other options as a short term loan (based on closing costs).

Initial Mortgage Insurance Premium (IMIP)

The IMIP on a Home Equity Conversion Mortgage is a one-time fee charged at closing. If the amount needed is 61% or higher the IMIP is 2.5% of the Maximum Claim Amount. If the funds needed are 60% or less, the IMIP is only .5% of the Maximum Claim Amount.

The way the IMIP is calculated changed as of September 29th 2013.

Underwriter  

The underwriter is an employee of the lender whose role is to evaluate a loan application to determine it is complete and meets all underwriting guidelines and applicable federal or state laws governing that type of loan. This can include documents submitted by the borrower, the application paperwork, credit report, title report, appraisal, and anything else necessary within the guidelines to approve, deny or suspend the loan.

Underwriting Guidelines

The underwriting guidelines are the rules and regulations used to determine whether a particular loan application qualifies for a loan. The guidelines are often designed to protect the best interest of the borrower as well as the lender. With Home Equity Conversion Mortgage (HECM)reverse mortgage, there are FHA guidelines as well as those of the lender. This can result in FHA saying something is acceptable, but the lender being unwilling to lend.  So even though two different lenders are both doing HECM loans, they may have different guidelines (or lending rules).