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September 17, 2017
When you get a reverse mortgage, you are borrowing your own home equity. (Home equity is the difference between what your home is worth and the amount you owe on your home.) So if your home is appraised at $300,000 and you still owe $50,000 on the mortgage, then you have $250,000 in home equity.
What makes reverse mortgages unique (and very different from a traditional home equity loan) is that you do not have to pay back the reverse mortgage for as long as you live there. There are absolutely no ongoing monthly loan payments (although you must continue to pay for taxes and insurance on the property.)
Best of all, you can use your home equity to spend in any way you want. By eliminating existing mortgage payments, a reverse mortgage can improve your cash flow. It can also be a powerful financial planning tool, giving you more options for managing your overall wealth.
Reverse mortgages can be a little complicated. However, understanding all of the terms used to define these loans can help you really know what a reverse mortgage is all about.
Here are reverse mortgage definitions for the terms and concepts used when talking about these loans. Reverse mortgages a to b…
Appraisal: As with any mortgage, an appraisal is required. An appraisal is the process of inspecting a home’s condition and assessing the market value of the home. Typically the borrower pays for the appraisal as part of their closing costs.
Calculator / Reverse Mortgage Calculator: A Reverse Mortgage Calculator is a tool that calculates how much money you could borrow with a Reverse Mortgage. You enter information about you and your home equity to get results from the Reverse Mortgage Calculator.
Cash (Lump Sum Cash Advance): With certain types of Reverse Mortgages, borrowers can receive their Reverse Mortgage payout in cash – a single lump sum.
Other Reverse Mortgage payment options include: Line of Credit, Tenure, Modified Tenure and Term. And, Reverse Mortgage payouts can be customized with a mix of different payout options.
Closing Costs: Closing costs on a Reverse Mortgage are the costs a borrower must pay to secure a Reverse Mortgage. Reverse Mortgage closing costs are sometimes criticized for being too high, but they can actually be paid with the Reverse Mortgage itself, so there are usually only a few out of pocket expenses. These fees may include an origination fee, title insurance, appraisal, lawyers, pest and other inspections, escrow, a credit report and more. Closing costs on proprietary reverse mortgages vary and in some cases are waived by the lender.
Counselor / Reverse Mortgage Counselor: The federal government mandates that all Reverse Mortgage candidates meet with an unbiased HUD approved counselor before completing a Reverse Mortgage application.
The counselor – from a government-approved agency – explains the advantages and disadvantages of a Reverse Mortgage.
The Department of Housing and Urban Development (HUD): HUD defines itself as the Nation’s Housing Agency. It is a federal department committed to increasing homeownership. HUD is the creator of the HECM, the most popular and one of the first Reverse Mortgage products. The HECM is offered from qualified lenders.
Fannie Mae: Fannie Mae is a publicly traded company that works with the federal government to direct funds toward helping low, moderate and middle-income Americans in homeownership.
Federally Insured: The HECM Reverse Mortgage product is federally insured. Being federally insured means that the federal government guarantees payment on any loan default.
Fully Indexed Rate: The Fully Indexed Rate is the interest rate that you pay on a Reverse Mortgage. There are two types of Fully Indexed Rates:
HECM: See Home Equity Conversion Mortgage.
Home Equity: Your home equity is the value of your home minus any balance on your mortgage. With a Reverse Mortgage, your mortgage and any other liens against your home must be paid off, but you can use the proceeds of your Reverse Mortgage to do this.
Home Equity Conversion Mortgage (HECM): The HECM, regulated by the Department of Housing and Urban Development/Federal Housing Administration (HUD) is the most common type of Reverse Mortgage and is federally insured.
HUD: See The Department of Housing and Urban Development.
Index Base Rate: Different Reverse Mortgage loan programs use different Index Base Rates. An Index Base Rate is the interest rate of the publicly published financial index upon which the Fully Indexed Rate is based.
Interest Rate Caps: Interest Rate Caps are a preset maximum interest rate that may be charged over the life of the loan. The Fully Indexed Rate of the Reverse Mortgage loan can not exceed the Interest Rate Cap. The loan may or may not reach this maximum depending on the change in Index Base Rate.
Jumbo Reverse Mortgage: See Proprietary Reverse Mortgages. Or learn more about jumbo reverse mortgages here.
Lender: A lender is the entity that offers you the loan. Any lender approved by HUD can offer the HECM product. Due to regulations on these products, lenders have very little ability to negotiate fees and costs on these loans.
Lending Limits: A lending limit is the maximum Reverse Mortgage loan amount that any home would qualify for. Presently, the national lending limit on an HECM Reverse Mortgage is $970,800. Lending Limits are used along with your age and prevailing interest rates to determine your “Loan Amount.”
Lien: A lien is a legal claim against property that acts as security against payment of debts. A mortgage loan is the most common type of lien.
All liens, including the outstanding balance on your mortgage must be paid when securing a Reverse Mortgage loan.
Line of Credit: A popular payout method for a Reverse Mortgage is a line of credit. The entire Reverse Mortgage loan amount is available to you in a Line of Credit, but you only pay interest on the funds you withdraw for use.
Other Reverse Mortgage payment options include: Tenure, Cash, Modified Tenure and Term. And, Reverse Mortgage payouts can be customized with a mix of different payout options.
Loan Amount: Loan amount is the term that refers to the actual amount you are eligible to borrow with a Reverse Mortgage. The loan amount is determined by the lending limits of the particular Reverse Mortgage product, as well as:
Margin: The Margin is the difference between the interest rate charged by the lenders and Index Base Rate. The margins for the HECM are set by law.
Modified Tenure: This is a Reverse Mortgage payout option that combines a line of credit with monthly payments (like an annuity). Other Reverse Mortgage payment options include: Line of Credit, Tenure, Cash and Term. And, Reverse Mortgage payouts can be customized with a mix of different payout options.
Mortgage Insurance: The HECM is the only product that requires mortgage insurance. The premium on the insurance is two percent of your home’s value or the maximum claim you could make on the home, whichever is less. There is also an annual premium of ½ a percent of the loan balance. This is paid to the FHA by the borrower, but is generally financed through the loan itself.
Origination Fee: As in most mortgages, Reverse Mortgages charge an Origination Fee – a fee charged by the lender for processing the application and making the loan.
Payout Options: Depending on the loan you choose, the money from your HECM Reverse Mortgage can come to you in one of three different payout options:
Periodic Rate Adjustments: Periodic Rate Adjustments refers to the periodic adjustment to the Fully Indexed rate. The adjustment period varies by product, monthly, bi-annually or annually. The adjustment amount is the difference between the Index Base Rate at the beginning of the period and the Index Base Rate at the end of the period.
Primary Residence: A Reverse Mortgage can only be taken on a primary residence. A primary residence is defined as the property you occupy for more than 50% of the year.
Proprietary Reverse Mortgages: Sometimes referred to as Jumbo Reverse Mortgages or private Reverse Mortgages. These loans are no longer widely available.
Qualifications: The primary qualifying factors for receiving a Reverse Mortgage is that you are 62 years old or older, own your home and intend to continue living there.
Service Fee Set Aside: The Servicing Set-Aside is an amount of money taken out of the loan funds to cover the future costs of monthly service fees charged to the loan. Typically these fees are between $20 and $35 dollars; capped by the federal government. Unlike the other costs financed in the loan, the Servicing Set-Aside is not added to the principal of the loan initially, but on a month-by-month basis as the monthly fee is applied.
Servicing Fee: The Servicing Fee is a small monthly charge that covers the cost of maintaining your loan.
Tenure Option: Regarding a Reverse Mortgage, Tenure Option refers to a payout option for your loan. The Tenure Option gives you equal monthly payments (like an annuity) for as long as you occupy your home.
Other Reverse Mortgage payment options include: Line of Credit, Cash, Modified Tenure and Term. And, Reverse Mortgage payouts can be customized with a mix of different payout options.
Term: This is a Reverse Mortgage payout option that pays you equal monthly payments for a fixed period of time (like an annuity). Other Reverse Mortgage payment options include: Line of Credit, Cash, Tenure and Modified Tenure. And, Reverse Mortgage payouts can be customized with a mix of different payout options.
Third Party Closing Costs: See Closing Costs.
Total Annual Loan Cost (TALC): The TALC is the average combined annual costs of your Reverse Mortgage loan. This is a useful figure to use when comparing different loans.
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