Reverse Mortgage Loan Glossary: Key Terms You Must Know
As you continue to learn about what reverse mortgages are, how they work and whether one could improve your financial situation in retirement, you no doubt will encounter many terms, abbreviations and acronyms. Here is a helpful reverse mortgage loan glossary to make your navigation a little easier:
abstract of title A historical summary provided by a title insurance company of all records affecting the title to a property.
acceleration clause Allows a lender to declare the entire outstanding balance of a loan immediately due and payable should a borrower violate specific loan provisions or default on the loan.
adjustable rate mortgage (ARM) A variable or flexible rate mortgage with an interest rate that varies according to the financial index it is based upon. To limit the borrower's risk, the ARM may have a payment or rate cap. See also: cap.
amenities Features of your home that fit your preferences and can increase the value of your property. Some examples include the number of bedrooms, bathrooms, or vicinity to public transportation.
American Exceptionalism an ideology holding the United States is different and unique among nations and therefore the lessons learned from history do not apply.
amortization The liquidation of a debt by regular, usually monthly, installments of principal and interest. An amortization schedule is a table showing the payment amount, interest, principal and unpaid balance for the entire term of the loan. annual cap. See: cap. annual percentage rate (A.P.R.) The actual interest rate, taking into account points and other finance charges, for the projected life of a mortgage. Disclosure of APR is required by the Truth-in-Lending Law and allows borrowers to compare the actual costs of different mortgage loans.
appraisal An estimate of a property's value as of a given date, determined by a qualified professional appraiser. The value may be based on replacement cost, the sales of comparable properties or the property's ability to produce income.
appreciation A property's increase in value due to inflation or economic factors.
A.P.R. See: annual percentage rate.
ARM See: adjustable rate mortgage.
assessment Charges levied against a property for tax purposes or to pay for municipality or association improvements such as curbs, sewers, or grounds maintenance.
assignment The transfer of a contract or a right to buy property at given rates and terms from a mortgagee to another person.
assumption An agreement between a buyer and a seller, requiring lender approval, where the buyer takes over the payments for a mortgage and accepts the liability. Assuming a loan can be advantageous for a buyer because there are no closing costs and the loan's interest rate may be lower than current market rates. Depending on what is in the mortgage or deed of trust, the lender may raise the interest rate, require the buyer to qualify for the mortgage, or not permit the buyer to assume the loan at all.
balloon mortgage Mortgage with a final lump sum payment that is greater than preceding payments and pays the loan in full.
biweekly mortgage A loan requiring payments of principal and interest at two-week intervals. This type of loan amortizes much faster than monthly payment loans. The payment for a biweekly mortgage is half what a monthly payment would be.
bond A certificate serving as security for payment of a debt. Bonds backed by mortgage loans are pooled together and sold in the secondary market.
bridge loan A loan to "bridge" the gap between the termination of one mortgage and the beginning of another, such as when a borrower purchases a new home before receiving cash proceeds from the sale of a prior home. Also known as a swing loan.
broker An intermediary between the borrower and the lender. The broker may represent several lending sources and charges a fee or commission for services.
buy-down Where the buyer pays additional discount points or makes a substantial down payment in return for a below market interest rate; or the seller offers 3-2-1 interest payment plans or pays closing costs such as the origination fee. During times of high interest rates, buy-downs may induce buyers to purchase property they may not otherwise have purchased.
cap A limit in how much an adjustable rate mortgage's monthly payment or interest rate can increase. A cap is meant to protect the borrower from large increases and may be a payment cap, an interest cap, a life-of-loan cap or an annual cap. A payment cap is a limit on the monthly payment. An interest cap is a limit on the amount of the interest rate. A life-of-loan cap restricts the amount the interest rate can increase over the entire term of the loan. An annual cap limits the amount the interest rate can increase over a twelve-month period.
certificate of reasonable value (CRV) A Veteran's Administration appraisal that establishes the maximum VA mortgage loan amount for a specified property.
certificate of title Document rendering an opinion on the status of a property's title based on public records.
closed-end line of credit A line of credit that you can make prepayments on, but those funds would not be available for future use.
closed-end mortgage A mortgage principal amount that is fixed and cannot be increased during the life of the loan. See also: open-end mortgage.
closing costs Costs payable by both seller and buyer at the time of settlement, when the purchase of a property is finalized. These costs can be up to ten percent of the mortgage amount and usually include but are not limited to the following:
cloud A claim to the title of a property that, if valid, would prevent a purchaser from obtaining a clear title.
collateral Something of value pledged as security for a loan. In mortgage lending, the property itself serves as collateral for a mortgage loan. .
commitment fee A fee charged when an agreement is reached between a lender and a borrower for a loan at a specific rate and points and the lender guarantees to lock in that rate.
co-mortgagor One who is individually and jointly obligated to repay a mortgage loan and shares ownership of the property with one or more borrowers. See also: co-signer.
condominium An individually owned unit within a multi-unit building where others or the Condominium Owners Association share ownership of common areas such as the grounds, the parking facilities and the tennis courts.
conforming loan A loan that conforms to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. See also: non-conforming loan.
construction loan A short-term loan financing improvements to real estate, such as the building of a new home. The lender advances funds to the borrower as needed while construction progresses. Upon completion of the construction, the borrower must obtain permanent financing or pay the construction loan in full.
consumer handbook on adjustable rate mortgages (C.H.A.R.M.) A disclosure required by the federal government to be given to any borrower applying for an adjustable rate mortgage (ARM).
conventional loan A mortgage loan that is not insured, guaranteed or funded by the Veterans Administration (VA), the Federal Housing Administration (FHA) or Rural Economic Community Development (RECD) (formerly Farmers Home Administration).
convertible mortgage An adjustable rate mortgage (ARM) that allows a borrower to switch to a fixed-rate mortgage at a specified point in the loan term.
co-signer One who is obligated to repay a mortgage loan should the borrower default but who does not share ownership in the property. See also: co-mortgagor.
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.
covenants Rules and restrictions governing the use of property.
CRV See: certificate of reasonable value.
curtailments The borrower's privilege to make payments on a loan's principal before they are due. Paying off a mortgage before it is due may incur a penalty if so specified in the mortgage's prepayment clause.
debt Money owed to repay someone.
debt-to-income ratio The ratio between a borrower's monthly payment obligations divided by his or her net effective income (FHA or VA loans) or gross monthly income (conventional loans).
deed of trust A document, used in many states in place of a mortgage, held by a trustee pending repayment of the loan. The advantage of a deed of trust is that the trustee does not have to go to court to proceed with foreclosure should the borrower default on the loan.
Department of Housing and Urban Development (HUD) The U.S. government agency that administers FHA, GNMA and other housing programs.
discount points Amounts paid to the lender based on the loan amount to buy the interest rate down. Each point is one percent of the loan amount; for example, two points on a $100,000 mortgage is $2,000.
Discretionary Income Income remaining after deduction of taxes, other mandatory charges, and expenditure on necessary items.
down payment The difference between the purchase price and mortgage amount. The down payment becomes the property equity. Typically it should be cash savings, but it can also be a gift that is not to be repaid or a borrowed amount secured by assets.
due-on-sale A clause in a mortgage or deed of trust allowing a lender to require immediate payment of the balance of the loan if the property is sold (subject to the terms of the security instrument).
duplex Dwelling divided into two units.
earnest money Deposit in the form of cash or a note, given to a seller by a buyer as good faith assurance that the buyer intends to go through with the purchase of a property.
easement The right one party has in regard to the property of another, such as the right of a public utility company to lay lines.
Economist An expert in economics.
Equal Credit Opportunity Act A federal law prohibiting lenders and other creditors from discrimination based on race, color, sex, religion, national origin, age, marital status, receipt of public assistance or because an applicant has exercised his or her rights under the Consumer Credit Protection Act.
equity The value of a property beyond any liens against it. Also referred to as owner's interest.
equity sharing A feature offered in proprietary reverse mortgages that allows a borrower to receive more funds, or pay a lower interest rate, in exchange for giving up a percentage of the home’s future value. No longer offered in any reverse mortgage programs.
escape clause A provision allowing one party or more to cancel all or part of the contract if certain events fail to happen, such as the ability of the buyer to obtain financing within a specified period.
escrow Money placed with a third party for safekeeping either for final closing on a property or for payment of taxes and insurance throughout the year.
fair market value The price a property can realistically sell for, based upon comparable selling prices of other properties in the same area.
Fannie Mae Nickname for Federal National Mortgage Association (FNMA).
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) A quasi-governmental, federally-sponsored organization that acts as a secondary market. investor to buy and sell mortgage loans. FHLMC sets many of the guidelines for conventional mortgage loans, as does FNMA.
Federal Housing Administration (FHA) An agency within the Department of Housing and Urban Development that sets standards for underwriting and insures residential mortgage loans made by private lenders. One of FHA's objectives is to ensure affordable mortgages to those with low or moderate income. FHA loans may be high loan-to-value, and they are limited by loan amount. FHA mortgage insurance requires a fee of 1.5 percent of the loan amount to be paid at closing, as well as an annual fee of 0.5 percent of the loan amount added to each monthly payment.
Federal National Mortgage Association (FNMA or Fannie Mae) A private corporation that acts as a secondary market. investor to buy and sell mortgage loans. FNMA sets many of the guidelines for conventional mortgage loans, as does FHLMC. The major purpose of this organization is to make mortgage money more affordable and more available.
fee simple The maximum form of ownership, with the right to occupy a property and sell it to a buyer at any time. Upon the death of the owner, the property goes to the owner's designated heirs. Also known as fee absolute.
FHA See: Federal Housing Administration.
fifteen-year mortgage A loan with a term of 15 years. Although the monthly payment on a 15-year mortgage is higher than that of a 30-year mortgage, the amount of interest paid over the life of the loan is substantially less.
fixed-rate mortgage A mortgage whose rate remains constant throughout the life of the mortgage.
flood insurance The Federal Flood Disaster Protection Act of 1973 requires that federally-regulated lenders determine if real estate to be used to secure a loan is located in a Specially Flood Hazard Area (SFHA). If the property is located in a SFHA area, the borrower must obtain and maintain flood insurance on the property. Most insurance agents can assist in obtaining flood insurance.
FNMA See: Federal National Mortgage Association
Freddie Mac Nickname for Federal Home Loan Mortgage Corporation (FHLMC).
gift This includes amounts from a relative or a grant from the borrower's employer, a municipality, non-profit religious organization, or non-profit community organization that does not have to be repaid.
Gilded Age the time between the Civil War and World War I during which the U.S. population and economy grew quickly, there was a lot of political corruption, corporate financial misdealings and many wealthy people lived very fancy lives.
Ginnie Mae Nickname for Government National Mortgage Association (GNMA).
good faith estimate Estimate on closing costs and monthly mortgage payments provided by the lender to the homebuyer within 3 days of applying for a loan.
Government National Mortgage Association (GNMA or Ginnie Mae) A government organization that participates in the secondary market, securitizing pools of FHA, VA, and RHS loans.
graduated payment mortgage (GPM) A fixed-interest loan with lower payments in the early years than the later years. The amount of the payment gradually increases over a period of time and then levels off at a payment sufficient to pay off the loan over the remaining amortization period.
hazard insurance A form of insurance that protects the insured property against physical damage such as fire and tornadoes. Mortgage lenders often require a borrower to maintain an amount of hazard insurance on the property that is equal at least to the amount of the mortgage loan.
home equity loan A mortgage on the borrower's principal residence, usually for the purpose of making home improvements or debt consolidation. .
home inspection A thorough review of the physical aspects and condition of a home by a professional home inspector. This inspection should be completed prior to closing so that any repairs or changes can be completed before the home is sold.
homeowners insurance A form of insurance that protects the insured property against loss from theft, liability and most common disasters.
Housing and Urban Development. (HUD) The U.S. government agency that administers FHA, GNMA and other housing programs.
housing affordability index Indicates what proportion of homebuyers can afford to buy an average-priced home in specified areas. The most well known housing affordability index is published by the National Association of Realtors.
housing expenses-to-income ratio See: debt-to-income ratio.
HUD See: Housing and Urban Development.
income approach to value A method used by real estate appraisers to predict a property's anticipated future income. Income property includes shopping centers, hotels, motels, restaurants, apartment buildings, office space and so forth.
income-to-debt ratio See: debt-to-income ratio.
index A published interest rate compiled from other indicators such as U.S. Treasury bills or the monthly average interest rate on loans closed by savings and loan organizations. Mortgage lenders use the index figure to establish rates on adjustable rate mortgages (ARMs).
initial principal limit Amount of funds you are eligible to receive from a reverse mortgage before closing costs are deducted.
insurance As a part of PITI, the amount of the monthly mortgage payment that does not include the principal, interest, and taxes. Also see: homeowners insurance.
interest The amount of the entire mortgage loan which does not include the principal. Also, as a part of PITI, the amount of the monthly mortgage payment which does not include the principal, taxes, and insurance.
interest cap See: cap.
interest rate The simple interest rate, stated as a percentage, charged by a lender on the principal amount of borrowed money. See also: Annual Percentage Rate.
Expected Interest Rate: The interest rate used to calculate the principal limit. It equals either the 10-year CMT or the 10-year LIBOR rate plus a margin.
Actual Interest Rate: The interest rate first charged on the loan beginning at closing; it equals one of the HUD-approved interest rate indices (1-month CMT, 1-year CMT, or 1-month LIBOR) plus a margin. Also called Initial Interest Rate.
Variable Rate: An interest rate that adjusts monthly or annually.
Fixed Rate: An interest rate that remains constant over the life a the loan.
interest rate structure See: Index, Margin
joint tenancy See: tenancy.
jumbo loan A nonconforming loan that is larger than the limits set by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines.
key lot Real estate deemed highly valuable because of its location.
L lien A claim against a property for the payment of a debt. A mortgage is a lien; other types of liens a property might have include a tax lien for overdue taxes or a mechanics lien for unpaid debt to a subcontractor.
life-of-loan cap See: cap.
line of credit growth feature In some cases, the available line of credit increases over time according to the terms of the loan agreement.
liquidity The capability of an asset to be readily converted into cash.
loan closing date Date on which your reverse mortgage is scheduled to close.
loan discount See: points.
loan origination fee See: origination fee.
loan-to-value ratio (LTV) The relationship, expressed as a percentage, between the amount of the proposed loan and a property's appraised value. For example, a $75,000 loan on a property appraised at $100,000 is a 75% loan-to-value.
lock-in: The guarantee of a specific interest rate and/or points for a specific period of time. Some lenders will charge a fee for locking in an interest rate.
maintenance costs The cost of the upkeep of the house. These costs may be minor in cost and nature (replacing washers in the faucets) or major in cost and nature (new heating system or a new roof) and can apply to either the interior or exterior of the house.
margin The amount a lender adds to the index of an adjustable rate mortgage to establish an adjusted interest rate. For example, a margin of 1.50 added to a 7 percent index establishes an adjusted interest rate of 8.50 percent.
market value The price a property can realistically sell for, based upon comparable selling prices of other properties in the same area.
Maximum Claim Amount The lesser of a home's appraised value or the maximum loan limit that can be insured by FHA. Used in determining the principal limit.
MIP (Mortgage Insurance Premium) Under the HECM program, a fee charged to borrowers that is equal to a small percentage of the maximum claim amount, plus an annual premium thereafter on the loan balance. The MIP guarantees that if the lender goes out of business, FHA will step in and ensure the borrower has continued access to his or her loan funds. The MIP further guarantees that when the property is sold to pay back the reverse mortgage, the borrower will never owe more than the value of the home.
modification A change in the terms of the mortgage note, such as a reduction in the interest rate or change in maturity date.
Monthly Service Fees A fee charged by the loan servicer for administering a loan after closing, such as disbursing loan funds, maintaining loan records and sending statements
mortgage A legal instrument in which property serves as security for the repayment of a loan. In some states, a deed of trust is used rather than a mortgage.
mortgage banker A lender that originates, closes, services and sells mortgage loans to the secondary market.
mortgage broker An intermediary between a borrower and a lender. A broker's expertise is to help borrowers find financing that they might not otherwise find themselves.
mortgage insurance Money paid to insure the lender against loss due to foreclosure or loan default. Mortgage insurance is required on conventional loans with less than a 20 percent down payment. FHA mortgage insurance requires a payment of 1.5 percent of the loan amount to be paid at closing, as well as an annual fee of 0.5 percent of the loan amount added to each monthly payment.
mortgage interest Interest rate charge for borrowing the money for the mortgage. It is a used to calculate the interest payment on the mortgage each month.
mortgage term The length of time that a mortgage is scheduled to exist. Example: a 30-year mortgage term is for 30 years.
mortgagee The lender.
mortgagor The borrower.
negative amortization A situation in which a borrower is paying less interest than what is actually being charged for a mortgage loan. The unpaid interest is added to the loan's principal. The borrower may end up owing more than the original amount of the mortgage.
Net Principal Limit Amount of funds you are eligible to receive at closing after loan costs have been deducted.
non-assumption clause In a mortgage contract, a statement that prohibits a new buyer from assuming a mortgage loan without the approval of the lender.
non-conforming loan A loan that does not conform to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. Jumbo loans are nonconforming. See also: conforming loan.
Non-Recourse Loan A feature that limits the amount owed by the borrower, heirs or estate when the loan becomes due and payable to the appraised home value. For the HECM program, non-recourse only applies when the home is sold.
note A signed document that acknowledges a debt and shows the borrower is obligated to pay it.
Open End Line of Credit A line of credit that allows the borrower to withdrawal funds, make payments back to the lender, and then have the ability to make subsequent withdrawals. open-end mortgage A mortgage allowing the borrower to receive advances of principal from the lender during the life of the loan. See also: closed-end mortgage.
origination fee The amount charged by a lender to originate and close a mortgage loan. Origination fees are usually expressed in points.
payment cap See: cap.
P&I Abbreviation for principal and interest.
PITI Abbreviation for principal, interest, taxes and insurance.
points Charges levied by the lender based on the loan amount. Each point equals one percent of the loan amount; for example, two points on a $100,000 mortgage is $2,000. Discount points are used to buy down the interest rate. Points can also include a loan origination fee, which is usually one point.
pre-qualification Tentative establishment of a borrower's qualification for a mortgage loan amount of a specific range, based on the borrower's assets, debts, and income.
Prepayment Penalty Paying off a reverse mortgage early (that is, before the borrower permanently vacates the property). Under the HECM program, there is no penalty for paying all, or a portion, of the loan prematurely.
prime rate The interest rate commercial banks charge their most creditworthy customers.
principal The amount of the entire mortgage loan, not counting interest. Also, as a part of PITI, the amount of the monthly mortgage payment which does not include the interest, insurance, and taxes. Principal Limit The total loan proceeds available at closing.
Principal Limit Lock A feature that allows borrowers to lock-in the principal limit for a specific period of time.
property tax The amount which the state and/or locality assesses as a tax on a piece of property.
prorate To proportionally divide amounts owed by the buyer and the seller at closing.
qualification As determined by a lender, the ability of the borrower to repay a mortgage loan based on the borrower's credit history, employment history, assets, debts and income.
rate cap See: cap.
Recordation Tax A special assessment for recording a mortgage lien. The tax is typically paid at closing by the borrower. RESPA Abbreviation for the Real Estate Settlement Procedures Act, which allows consumers to review settlement costs at application and once again prior to closing.
reverse annuity mortgage A type of mortgage loan in which the lender makes periodic payments to the borrower. The borrower's equity in the home is used as security for the loan.
RHCDS Rural Housing and Community Service
right of first refusal Purchasing a property under conditions and terms made by another buyer and accepted by the seller.
right of rescission When a borrower's principal dwelling is going to secure a loan, the borrower has three business days following signing of the loan documents to rescind or cancel the transaction. Any and all money paid by the borrower must be refunded upon rescission. The right to rescind does not apply to loans to purchase real estate or to refinance a loan under the same terms and conditions where no additional funds will be added to the existing loan.
rollover At the end of the construction loan period, the borrower's file is delivered to Bank One Mortgage Loan Servicing Dept. Prior to delivery, CLD contacts the borrower and obtains funds for the tax and insurance escrows, a final title policy and homeowner's policy. This process is called a rollover.
Rural Housing and Community Development Service A federal agency that administers mortgage loans for buyers in rural areas.
second mortgage A loan that is junior to a primary or first mortgage and often has a higher interest rate and a shorter term.
secondary market A market comprising investors like GNMA, FHLMC and FNMA, which buy large numbers of mortgages from the primary lenders and sell them to other investors.
servicing The responsibility of collecting monthly mortgage payments and properly crediting them to the principal, taxes and insurance, as well as keeping the borrower informed of any changes in the status of the loan.
Servicing Set Aside Amount of funds estimated at closing that 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 each month to the loan servicer.
settlement costs See: closing costs.
Social Darwinism the theory that individuals, groups, and peoples are subject to the same Darwinian laws of natural selection as plants and animals. Now largely discredited, social Darwinism was advocated by Herbert Spencer and others in the late 19th and early 20th centuries and was used to justify political conservatism, imperialism, and racism and to discourage intervention and reform.
Social Legislation Laws that seek to promote the common good, generally by protecting and assisting the weaker members of society,
Subordinated Debt A lien placed on the home behind the reverse mortgage.
survey A physical measurement of property done by a registered professional showing the dimensions and location of any buildings as well as easements, rights of way, roads, etc.
tax deed A written document conveying title to property repossessed by the government due to default on tax payments.
tax savings The amount of money that the homeowner is not required to pay the government in taxes because he or she owns a home.
taxes As a part of PITI, the amount of the monthly mortgage payment which does not include the principal, interest, and insurance.
tenancy joint tenancy – equal ownership of property by two or more parties, each with the right of survivorship. tenancy by the entireties – ownership of property only between husband and wife in which neither can sell without the consent of the other and the property is owned by the survivor in the event of death of either party. tenancy in common – equal ownership of property by two or more parties without the right of survivorship. tenancy in severalty – ownership of property by one legal entity or a sole party. tenancy at will – a license to use or occupy a property at the will of the owner.
Tenure Payment Option Fixed monthly loan advances for as long as a borrower lives in a home. Term Payment Option Fixed monthly loan advances or payments for a specified period of time.
title A formal document establishing ownership of property.
title insurance A policy issued by a title insurance company insuring the purchaser against any errors in the title search. The cost of title insurance may be paid for by the buyer, the seller or both.
trust deed See: deed of trust. Truth In Lending Act The Truth In Lending Act requires lenders to disclose the Annual Percentage Rate and other associated costs to homebuyers within three working days of the loan application.
underwriter A professional who approves or denies a loan to a potential homebuyer based on the homebuyer's credit history, employment history, assets, debts and other factors such as loan guidelines.
Uniform Settlement Statement A standard document prescribed by the Real Estate Settlement Procedures Act containing information for closing which must be supplied to both buyer and seller.
Veterans Administration (VA) The federal agency responsible for the VA loan guarantee program as well as other services for eligible veterans. In general, qualified veterans can apply for home loans with no down payment and a funding fee of 1 percent of the loan amount.
walk-through An inspection of a property by the prospective buyer prior to closing on a mortgage. warranty deed A document protecting a homebuyer against any and all claims to the property
yield The rate of earnings from an investment.
zoning The ability of local governments to specify the use of private property in order to control development within designated areas of land. For example, some areas of a neighborhood may be designated only for residential use and others for commercial use such as stores, gas stations, etc.