Reverse Mortgages

Learn the terms most commonly used by reverse mortgage lenders. Sound like an expert when you are shopping for a reverse mortgage.

Basic Reverse Mortgage Terms

Be familiar with the following acronyms and terms so that when you speak with a reverse mortgage lender you will sound like an expert.

Adjustable Rate Mortgage (ARM) - Since most reverse mortgages have an adjustable interest rate, it is important to know the following.

  • Index - An ever-changing number used to calculate a reverse mortgage rate. Common indices are published in business newspapers.
  • Margin - A set percentage the reverse mortgage lender adds to the index. The index plus the margin is the "fully index rate" used to calculate the interest due.
  • LIBOR - London Interbank Offered Rate, which is currently the index being used by most reverse mortgage lenders.
  • CMT - Constant Maturity Treasury, which was the index of choice for reverse mortgage lenders in the recent past.

Equity Distribution - The purpose of a reverse mortgage is to put money in the pocket of the home owner. This can be done in four different ways: Term, Tenure, Line Of Credit, or Lump Sum. Each of these methods of distributing the equity of the home to the home owner serves a different purpose.

  • Term - Equity distributed regularly for a specified period of time, for example, $500 per month for 60 months.
  • Tenure - Equity distributed for life. The method works best for the home owner who wants the peace of mind that every month for the rest of his life he will receive an equity distribution from the reverse mortgage lender.
  • Line Of Credit - Equity distributed at will. The home owner is provided with a Line of Credit that can be accessed as needed using either a check book or in some cases a Visa debit card.
  • Lump Sum - Equity distributed all at once, up front. This method is commonly used to pay off an existing mortgage and end monthly mortgage payments. It is also excellent for consolidating high interest debts or paying off medical bills.

Home Equity Conversion Mortgage(HECM) - You pronounce this term Heck'em. This is by far the most common type of reverse mortgage available today. This is a government loan product offered through the US Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA). This type of reverse mortgage is also commonly called a HUD reverse mortgage.

Non-Recourse Loan - This term is very important because it refers to the guarantee that the reverse mortgage lender cannot expect more than the proceeds of sale from the house to pay off the reverse mortgage, regardless of the balance. If the home owner dies with a reverse mortgage balance of $100,000 and when the home is sold the proceeds are only $90,000, the reverse mortgage lender cannot go after the heirs for more money. The house offered for collateral is the only recourse the reverse mortgage lender has for paying off the balance due.

Renee Morgan

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