Reverse Mortgage Glossary

When doing research on reverse mortgage information, you may come across some terms that are unfamiliar to you. Whether they apply just to reverse mortgage loans, or all loan types, we want to make your search easier. Read on for definitions for all the most common reverse mortgage industry terms.

Reverse Mortgage Definitions

HUD Definition

U.S. Department of Housing and Urban Development (HUD) – Established in 1965, HUD is a United States government agency that was created to enforce fair housing laws, address housing needs, and improve and develop American communities, thus supporting community development, home ownership, and suitable living environments for all Americans. HUD is one of the governing bodies that regulates the reverse mortgage industry.

FHA Definition

The Federal Housing Administration (FHA) – A United States government agency that insures loans made by banks and private lenders, including AAG (though it is important to note that these lenders are not government entities). It was established in 1934 as part of the National Housing Act. Goals of the agency include providing adequate home financing systems through insurance of mortgage loans, stabilizing the mortgage market, and improving housing standards and conditions. To learn more about FHA insured reverse mortgage loans, you can visit our page here.

Principal Loan Limit Definition

Principal Loan Limit – The total amount of funds that are available to you at the closing of your reverse mortgage loan.  The Principal Loan Limit is determined by the age of the youngest borrower or non-borrowing spouse, the expected average interest rate, and the Maximum Claim Amount. Read more about the Key Factors That Determine Your Reverse Mortgage Payout.

Maximum Claim Amount Definition

Maximum Claim Amount – The amount used to determine the Principal Loan Limit. The MCA is determined by whichever is the lesser of either:
1. Your home’s appraised value or
2. $726,525 (updated January 1st, 2019) which is the maximum lending limit that can be insured by the Federal Housing Administration (FHA).

Mortgage Insurance Premium Definition

Mortgage Insurance Premium – The amount that a borrower pays to the Federal Housing Administration (FHA) towards the reverse mortgage loan’s insurance.  This insurance serves to protect both the lender and the borrower.  The lender is protected if a borrower defaults on the loan, and the borrower is protected if the lender goes out of business or the loan balance exceeds the value of the home. If you want to learn more about the MIP and other reverse mortgage loan costs, read our article on reverse mortgage fees.

Reverse Mortgage Interest Rate Definitions

Reverse mortgages are loans that are eventually repaid with interest. Many seniors wonder how the interest rates with reverse mortgages work and what the different rates mean. See below for a definitions of each, or you can read this comprehensive guide to reverse mortgage interest rates.

Adjustable Rate Mortgage Definition

Adjustable Rate Mortgage – A mortgage on which the interest rate adjusts periodically.  This is helpful in keeping initial rates and mortgage payments to a minimum. Rates may increase or decrease over time based on a pre-selected interest rate index.

Initial Interest Rate Definition

Initial Interest Rate (IIR) – The interest rate that is first charged when you close your loan.  This will equal either the 1-month CMT, or the 1-year CMT, or the 1-month LIBOR rate plus a margin.

Expected Interest Rate Definition

Expected Interest Rate (EIR) – The interest rate that is used to calculate the amount of a borrower’s principal limit.  This will equal either the 10-year CMT or the 10-year LIBOR rate plus a margin.

LIBOR Definition

LIBOR – Short for London Inter-Bank Offered Rate, Libor is the rate that the world’s leading banks charge each other for loans.  In turn, this is what is used to calculate the interest rate on a reverse mortgage loan.