If you are unclear about reverse mortgages, you are not alone. You likely haven’t heard about them until quite recently, and there is absolutely nothing wrong with this; because you are not eligible for one until you are 62, they have likely been off your radar for most of your life. When you and many others begin doing even the most cursory, high-level research, you are likely running into terms and concepts that are entirely new to you. This can make these loans feel daunting and unattainable, but we are here to help you understand them. In today’s blog, Family Home Loan Texas provides a helpful glossary to assist you in understanding the vocabulary and concepts associated with reverse mortgages.
What Is A Reverse Mortgage?
Before delving into the glossary, you need to understand the core components of a reverse mortgage. It is a loan that is available to those who are 62 or older, and it must be taken out on your primary residence. With this type of loan, a lender pays you based on the equity you have built up in your home. While interest does accrue, you do not have to pay it — or any part of the loan back — until you move out of your house. Reverse mortgages provide retirees the financial flexibility to live their golden years on their terms without worrying about a limited fixed income. Now that we have the basics covered, we can begin explaining common terms you will likely run into.
Fannie Mae (FNMA) and Freddie Mac (FHLMC):
These are two large lending agencies created by Congress and are part of the Federal Housing Finance Agency. These two organizations purchase most residential mortgages from banks and lenders, which allows mortgages to remain liquid, stable, and affordable.
Fiduciary Responsibility:
A fiduciary is a person or organization that acts on behalf of another person’s interests — primarily financially — putting this other person’s needs first. A fiduciary is required to act in their clients’ best interests.
H4P:
An abbreviation for the HECM for Purchase program
HECM:
HECM is often used interchangeably with the term reverse mortgage, but there is some difference. A HECM (Home Equity Conversion Mortgage) is the sole reverse mortgage that the U.S. Federal Government insures.
Home Equity:
Home equity is the difference between the value of one’s home and the outstanding balance of debts on the property. When you make mortgage payments, your home equity increases. Home equity is at the core of reverse mortgages, as the amount you receive from a lender is based on this.
Initial Principal Limit:
This is the amount you can receive from your reverse mortgage. This amount is determined by your age at the time you apply, your interest rate, and the appraised value of your home.
Interest Rate:
This is the amount of interest due per the agreed-upon period. It is a percentage and is determined by myriad factors, including the amount a lender is loaning to you, the principal sum of your loan, the national interest rate, and how long your mortgage is for.
Life Expectancy Set Aside (LESA):
This is an escrow account set up by putting aside a portion of your principal limit that is preserved to pay property charges. The exact amount varies from borrower to borrower, as it is based on factors unique to you.
Line of Credit:
This is a credit source that is extended to you. It is essentially a source of funds that can be withdrawn at the borrower’s discretion. This is also one of the three ways you can choose to receive your reverse mortgage funds. It is important to note that interest is paid only on the money that is actually taken out.
Maximum claim amount (MCA):
The maximum claim amount is used to calculate proceeds and is equal to either the home’s appraised value or the Federal Housing Administration (FHA) lending limit — whichever is less.
Mortgage Broker:
A mortgage broker can help you connect with lenders and strives to find the best fit for your specific needs. These individuals or institutions do not originate loans and are purely intermediaries.
Mortgage Insurance Premium (MIP):
The FHA put the mortgage insurance premium in place to protect you by ensuring that the amount required when you need to repay the loan will never exceed the home’s value.
Mortgage Lender:
A mortgage lender is a financial institution that provides and underwrites home loans. They set all the terms of your mortgage, including the interest rate, repayment schedule, and other additional parts of your mortgage.
Mortgage Loan:
A mortgage is used either by buyers of property to raise funds to purchase it or by existing property owners to raise funds for any purpose while putting a lien on their own property being mortgaged.
Mutual Mortgage Insurance Fund (MMIF):
The Mutual Mortgage Insurance Fund is the insurer of mortgages that the Federal Housing Administration guarantees.
Net Principal Limit:
A net principal limit is the amount of money you can receive from a loan after considering closing costs.
Non-Borrowing Spouse:
At the time of closing, this is your spouse, who is not on the reverse mortgage.
Eligible Non-Borrowing Spouse:
This is your spouse who has the attributes to qualify for a reverse mortgage should you pass away before paying off the loan.
Origination Fee:
This is a payment associated with the establishment of an account with a bank, broker, or other institution providing services that handle the processing of a loan.
Proceeds:
This is how much money you make from selling your home. In this context, it is how much is left over after paying back what you owe.
Contact Us To Learn More About Reverse Mortgage Terms
We know there is a lot to keep in mind when learning about reverse mortgages, but we are here to help you out. Family Home Loan Texas was founded by loan originator and long-time mortgage professional Rob Bramer. Rob has helped clients secure the loans they need both locally and nationally and can help you get the loan you need to live life on your terms. Call 1-800-990-LEND (5363) to speak with Rob about a reverse mortgage loan and to receive a free, no-commitment consultation.