Actual Interest Rate:
The initial interest rate applied to the loan at closing. The actual interest rate equals the HUD-approved interest rate (1-month CMT or 1-year CMT) with a margin included. This can also be called the Initial Interest Rate and is determined by the loan investor.
Appraisal:
An Appraisal is a report that provides a determination of the value of a home or property. The value is based on the property’s shape and characteristics, as well as comparable selling prices of properties with similar attributes in the same geographical area.
Constant Maturity Treasury (CMT) rate:
The constant maturity treasury rate plays a key role in determining the mortgage rate for all mortgages, including reverse mortgages. The CMT rate refers to a computed figure that is determined by measuring the average yield of varying treasury securities. It is typically presented as an index.
Equity Sharing:
Equity sharing allows the borrowing property or homeowner to pay a reduced interest rate or receive a larger amount of funds, with the understanding that the owner would be forfeiting a percentage of the home’s future value. Equity sharing is no longer offered in any reverse mortgage programs.
Expected Interest Rate:
The expected interest rate is the rate used to calculate the amount the borrower is eligible to receive. This rate is equal to the 10-year Constant Maturity Treasury rate, with a calculated margin factored in.
Fixed Rate:
Fixed rate mortgages have an interest rate that remains unchanged during the life of the loan.
Home Equity Conversion Mortgage (HECM):
A Home Equity Conversion Mortgage or HECM is the only reverse mortgage that is insured by the US Federal Government. A HECM is only available through an FHA-approved lender.
Index:
Reverse mortgage interest rates are tied to the CMT rate. See Constant Maturity Treasury rate.
Initial Interest Rate:
See Actual Interest Rate.
Initial Principal Limit:
The initial principal limit is the amount the borrower is eligible to receive from a reverse mortgage prior to the closing costs being deducted.
Line of Credit – Closed End:
A closed-end line of credit allows you to borrow a specific amount for a determined amount of time. You can make prepayments on a closed-end life on credit, however, once the loan is paid in full the account is permanently closed.
Line of Credit – Growth Feature:
With a growth feature line of credit, the available line of credit can increase over time in accordance with the terms set in the loan agreement.
Line of Credit – Open End:
A line of credit that allows the borrower to withdraw funds, but still have the ability to make subsequent withdrawals as needed, as long as the borrower makes payments back to the lender.
Loan Closing Date:
The date your reverse mortgage is scheduled to close.
Margin:
Margins are a factored amount added to the index rate to determine both the initial and the expected interest rate.
Maximum Claim Amount:
The maximum claim amount is determined by either the home’s appraised value or the maximum loan limit that can be insured by the FHA. The maximum claim amount is used to determine the principal limit.
Monthly Service Fees:
Monthly services fees are charged by the loan servicer for the administrative costs that are incurred after a loan closes, such as disbursing reverse mortgage funds, maintaining loan records, and providing statements.
Mortgage Insurance Premium (MIP):
The MIP is a fee charged to borrowers, equal to a small percentage of the maximum claim amount, with an additional annual premium, on the loan balance. The MIP protects the borrower by ensuring that if the lender goes out of business, the FHA will step in and ensure the borrower has access to their loan funds. The MIP also guarantees that the borrower will never owe more than the value of the home.
Net Principal Limit:
The total amount of funds you are eligible to receive after loan costs have been deducted.
Non-Recourse Loan:
A Non-recourse loan limits the amount that can be owed by the borrower, or their estate, when the loan comes due and the home is sold. For the HECM program, this only applies when the home is sold.
Origination Fee:
An origination fee is charged by the lender to cover administration costs for loan origination. A lender can charge either $2,500 or 2% of the first $200,000 of your home’s value, plus 1% of the amount over $200,000. Loan origination fees cap off at $6,000.
Prepayment Penalty:
Prepayment penalties are fees that are enacted when a mortgage is paid off before the term is completed. Paying off a reverse mortgage early, before the borrower vacates the property, comes with no penalty. With the HECM program, there is no prepayment penalty for paying off the loan prematurely.
Principal Limit:
The total proceeds from the reverse mortgage loan that would be available.
Principal Limit Lock:
Principal Limit Lock allows borrowers to lock in the principal limit for a determined amount of time.
Recordation Tax:
A tax for recording a mortgage lien. This tax is typically paid by the borrower.
Reverse Mortgage Counseling:
A service provided by an independent third party, typically approved by the U.S. Department of Housing and Urban Development, to make sure the borrower fully understands the reverse mortgage and reviews alternative options, prior to application. Mandatory for the HECM program and in certain states for all types of reverse mortgages.
Servicing Set Aside:
A determined amount of funds will be needed to service the reverse mortgage over the projected life of the loan. These funds are deducted from the initial principal limit and automatically paid monthly to the loan servicer.
Subordinated Debt:
A lien is placed on the home behind the reverse mortgage.
Tenure Payment Option:
A tenure payment option provides the borrower with fixed monthly loan advances for the amount of time a borrower lives in the home.
Term Payment Option:
Term payment options provide fixed monthly loan payments for a determined period of time.
Title Insurance:
Title insurance is an insurance policy that protects a homeowner, as well as the lender, from financial loss due to defects in the title of real property. The cost of the policy is generally paid by the borrower.
Variable Rate:
An interest rate that has the ability to adjust up or down, either monthly or annually.
