Whether you’re getting started with a reverse mortgage loan, or are just conducting your research, there may be a lot of terms that come up that can be a bit overwhelming. In this infographic, we’ve included only those industry key glossary terms that can be helpful to anyone interested in a reverse mortgage loan. This infographic should get you well on your way to understanding what a reverse mortgage loan is all about. Also, we’ve provided some additional resources to help you get started including:
Appraisals: The process of inspecting a home’s condition and assessing the market value of the home. However, the borrower must pay fees for the appraisals as part of their closing costs.
Calculator: Use a reverse mortgage loan calculator to get an estimate of the total proceeds you may receive. The calculator works by determining your eligibility and the amount you may qualify for based on several factors such as your home value, any existing mortgage balance, and your age.
Closing Costs: Closing costs with a reverse mortgage are the same costs associated with a traditional mortgage loan. These fees may include a credit report fee, flood certification fee, escrow fee, document prep fee, recording fee, courier fee, title insurance, pest inspection, and survey.
Counseling: The federal government mandates that all reverse mortgage loan candidates must meet with an unbiased HUD-approved counselor before completing a reverse mortgage application to ensure that all borrower(s) have all the information they need to make the right decision before entering the loan; this is to protect the borrower.
HECM: A HECM (Home Equity Conversion Mortgage) is a home equity loan that allows borrowers to access a portion of their equity. The loan amount is based on the age of the youngest borrower or eligible non-borrowing spouse, the interest rate, as well as the lesser of the home’s value or sales price, subject to HECM lending limits. They are backed by HUD and the FHA. HECM borrowers can qualify to receive a HECM on their home’s value up to $726,525 (effective January 1st, 2019).
HECM for Purchase: This option is designed to help senior homeowners accomplish two goals in the same transaction; purchase a more fitting residence and obtain a reverse mortgage loan. With the HECM for Purchase reverse mortgage, the borrower provides a down payment using the sale of the previous home or other savings. Many seniors have found this option helpful when wanting to purchase a new home that is closer to family or for vacation, smaller in size, or to accommodate new physical needs related to aging.
Home Equity: The market value of your home minus your mortgage, and any outstanding liens, such as a home equity line of credit.
HUD: The Department of Housing and Urban Development (HUD) is the nation’s agency committed to creating opportunities for quality and affordable homes for all. It’s also the primary agency involved in rulemaking and oversight for HECMs.
Interest Rates: Reverse Mortgage interest rates are determined based in part upon whether they are fixed or variable. If you choose to go with a fixed interest rate, you must take out a lump sum, whereas if you choose to go with a variable interest rate, you have the option of receiving payouts as a lump sum, line of credit, monthly payments, or a combination of all three.
Line of Credit: While you have access to the full payout from the loan, a line of credit differs from cash in that you only pay interest on the money you actually use. The unused line of credit can also grow over time on a reverse mortgage.
Loan Origination Fees: Fees that covers the lender’s operating costs and expenses. The amount of the fee may depend on the value of the home, however, HECMs are strictly regulated by HUD, and are FHA insured, which means there is a strict government mandated cap on this fee.
Miscellaneous Costs: Miscellaneous, upfront fees for counseling, appraisal, mortgage insurance premium, real estate settlement costs, origination fee, and lender service fees.
Monthly Payments: This option allows borrower(s) to choose a fixed monthly payment for a specified amount of time. However, the borrower(s) also have the option to receive fixed monthly payments for as long as they reside in the home and comply with the loan terms. The amount received each month will not change, even if the home decreases in value. A monthly payments option is only available on a variable interest rate.
Mortgage Insurance Premium (MIP): This MIP fee is mandatory per HUD and is intended to protect borrowers if the reverse mortgage loan surpasses the amount the house is worth when sold. This amount is paid upfront at closing.
Proprietary Reverse Mortgage Loan or “Advantage”: This option is for senior homeowners who have high-value properties and are wanting to access more than the HECM’s federally-set borrowing limit. Proprietary Reverse Mortgages do not have to follow the same requirements as HECM reverse mortgages and are not insured by the FHA.
Refinance: This option is designed for senior homeowners with a current reverse mortgage loan. Popular reasons for refinancing include taking advantage of a lower interest rate, adding a spouse to the mortgage, or accessing more cash when the equity in the home rises due to an increase in the home’s value.
Single Disbursement Lump Sum: If the borrower(s) is eligible for a $100,000 loan but only needs $30,000, the borrower(s) may choose to only receive the $30,000 in a one-time lump sum payment. Fixed rates remain the same, protecting you if the market rate rises, however, this option is only available to those on a fixed rate.