Following is vocabulary necessary to understanding and working through the application process of a reverse mortgage. None of this is rocket science. Just familiarize yourself with these words or phrases to better understand what a reverse mortgage is all about.
CMT - Constant Maturity Treasury is a commonly used index for adjustable rate mortgages. It is a desirable and stable index. This index value is derived from the sale of US Treasury notes. When US Treasuries are paying higher interest rates, the index goes up. The reverse is also true.
DPL - Deferred Payment Loans are mortgages made to seniors who need money for qualified purposes. Those purposes usually include home improvements made for safety and health reasons, such as heating or roof repair. Contact either your state or local housing authority to see if this type of reverse mortgage is available in your area.
HECM- Pronounced Heck'em, this type of reverse mortgage is the most common. Over 90% of today's reverse mortgage loans are HECM or HUD Reverse Mortgages. HECMs are government-insured loans that must meet certain guidelines. They are offered through the US Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA).
Index - Most reverse mortgage carry an adjustable interest rate. Adjustable interest rates are calculated by taking a published financial index and adding a fixed margin, which is negotiated between you and the lender. Most commonly, the indices used to calculate the interest due on a reverse mortgage are CMT or LIBOR.
LIBOR - London Interbank Offered Rate is the cost of loans between banks on an international level. This is a more volatile index than the CMT, but investors in reverse mortgage sometimes prefer it when the climate of the US economy is questionable. It represents a more global perspective to interest rates.
Line of Credit - There are four payment options when you arrange a reverse mortgage. The line of credit option can be the least expensive of all the choices. This is because you can leave it untouched and available for emergencies and you only pay interest on the amount you use.
Lump Sum - There are four payment options when you arrange a reverse mortgage. The lump sum option is good for a couple of reasons. One, it is the only way you can obtain a fixed interest rate. To get a fixed interest rate, you have to take all the money up front. Second, it is a great way to pay off existing debt, including the remaining mortgage on the home. Consolidate mortgage, credit card, or medical debt, and end monthly payments. This is a great way to improve your monthly cash flow.
Margin - This fixed percentage is added to an index in order to calculate the amount of interest due on your reverse mortgage. It represents the bank's expenses and profit for making the loan.
PTD- Property Tax Deferral reverse mortgages are offered by some state or local governments for seniors who are unable to pay their property taxes. If paying property taxes is a hardship for you, contact your state or local government housing authority to inquire about available programs.
TALC - Total Annual Loan Cost is a mandatory disclosure. Reverse mortgage lenders MUST tell you how much the loan is going to cost. The TALC is also a great tool for comparing different types of reverse mortgages side by side.
Tenure - There are four payment options when you arrange a reverse mortgage. Tenure means for life or as long as you reside in your home. You can literally get approved for monthly income for the rest of your life! Because the reverse mortgage lender has no way of knowing how long your life will be, this payment option has to be calculated very conservatively.
Term Payments - There are four payment options when you arrange a reverse mortgage. Term means set for a period of time. For example, you might receive $500 a month for 60 months, a specific amount for a set duration of time.