Reverse Mortgage Terms

Before you get too far into the site, I feel it is very important for you to see the various terms and definitions that are associated with the reverse mortgage.  Reviewing the following glossary of terms and definitions will help you absorb and better understand what is being talked about in this site.

Non-Recourse
The only recourse the lender has in regards to repayment of the loan is the sale of the property. In other words, the lender cannot pursue you, your estate or heirs for any losses associated with the loan. You can never personally be financially liable for more than 95% of the current appraised value of the home should the loan amount be more than that.

Max Claim Amount
The max claim amount is the appraised value of your home up to a value of $679,650. This is the starting point in determining what your principal limit will be.



Principal Limit
The loan amount you initially qualify for based on age, max claim amount and
current interest rates is called the principal limit.

Mandatory Obligations
Mandatory Obligations include the sum of closing costs, and any liens against the property. The sum is used to determine the percentage of principal limit that will be used initially.

HECM
Home Equity Conversion Mortgage is the true name given to this loan product by FHA.

Financial Assessment
A Financial Assessment will be conducted to qualify the borrower for a reverse mortgage based on credit, mortgage, tax and insurance history to verify they have the willingness and ability to continue to pay property charges and maintain the home.

Life Expectancy Set Aside – LESA
If the borrower fails the Financial Assessment, a portion of their equity is set aside to pay taxes and insurance for the number of years they are expected to live.

Fixed Rate
This is an interest rate that does not change during the life of the loan.



Adjustable Rate Mortgage
This is an interest rate that changes during the life of the loan at various intervals, depending on the loan terms. Typically the interest rate can adjust either monthly or one time annually.

Cap
This is the most the interest rate can rise or fall during the adjustment period.

Lifetime Cap
A lifetime cap is an established amount that indicates the most the interest rate can rise during the life of the loan.

Floor
The lowest the interest rate can go during the life of the loan is called the floor. This is based on the margin. 

Margin
The margin is used by the lender to determine the return on the loan they would like to earn. The margin is the lowest the interest rate could go if the index went to zero. This is the fixed portion of the interest rate and does not
change.

Index
This is the variable portion of the interest rate. The interest rate can move up or down, depending on what this index does. The LIBOR is the index that is currently used.



LIBOR – London Interbank Offered Rate
This is the index used to calculate the initial interest rate. This is either the 1-year LIBOR or the 1-month LIBOR, depending on the adjustable
rate mortgage you choose. 

Margin + 1-year LIBOR – Initial Rate (Annual Adjustable Rate)
Margin + 1-month LIBOR – Initial Rate (Monthly Adjustable Rate)

Initial Rate
This is the starting interest rate with either a fixed or adjustable rate mortgage. The initial rate is calculated by adding the margin and the index. The initial rate for a fixed rate is the same for the life of the loan.
Margin + Index = Initial Rate

Expected Rate
This is the interest rate that is forecasted by FHA for an adjustable-rate mortgage. It is used to determine the initial amount of money available from the reverse mortgage. This is calculated by adding the margin plus 10-year SWAP rate.
Margin + 10-year SWAP rate = Expected Rate

Growth Rate
This is the rate at which the available balance in the line of credit grows. The availability in the line of credit grows at the current rate plus .5%. Current Interest Rate + .5% = Growth Rate

Principal Residence
This is the primary residence of the borrower where they reside for most of the year.

Non-Borrowing Spouse
This is the spouse of the borrower that is not on the loan and not on title. Only borrowers 62 and older qualify for a reverse mortgage. The reverse mortgage comes with additional rights for spouses under the age of 62 which allows them to defer the sale of the home, allowing them to remain in the home if certain requirements are met.

Non-Borrowing Spouse
This is the spouse of the borrower that is not on the loan and not on title. Only borrowers 62 and older qualify for a reverse mortgage. The reverse mortgage comes with additional rights for spouses under the age of 62 which allows them to defer the sale of the home, allowing them to remain in the home if certain requirements are met.