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Glossary of Reverse Mortgage Terms

What's a CMT, or an HECM or a PTD? Here, a quick vocabulary guide

Acceleration clause - the part of a contract that says when a loan may be declared due and payable

Adjustable rate - an interest rate that changes, based on changes in a published market-rate index

Appraisal - an estimate of much a house would sell for if it were sold; also called its market value

Appreciation - an increase in a home's value

Area Agency on Aging (AAA) - a local or regional nonprofit organization that provides information on services and programs for older adults

Cap - a limit on the amount an adjustable interest rate may go up or down during a specified time period

Closing - a meeting where documents are signed to "close the deal" on a mortgage; the time a mortgage begins

CMT rate – the Constant Maturity Treasury rate, used as an interest rate index in the HECM program

Condemnation - a court action saying a property is unfit for use: also, the government taking private property to use for the public by the right of eminent domain

Creditline - a credit account that lets a borrower decide when to take money out and also how much to take out; also known as a "line-of-credit" or "credit line."

Current interest rate – in the HECM program, the interest rate currently being charged on a loan, which equals one of the HUD-approved interest rate indices (1-month CMT, 1-year CMT, or 1-month LIBOR) plus a margin

Deferred payment loans (DPLs) - reverse mortgages that give you a lump sum of cash to repair or improve a home; usually offered by state or local governments

Depreciation - a decrease in the value of a home

Eminent domain - the right of a government to take private property for public use; for example, taking private land to build a highway

Expected interest rate - in the HECM program, the interest rate used to determine a borrower's loan advance amounts; it equals either the 10-year CMT or the 10-year LIBOR rate plus a margin (see below)

Federal Housing Administration (FHA) - the part of the U. S. Department of Housing and Urban Development (HUD) that insures HECM loans

Federally insured reverse mortgage - a reverse mortgage guaranteed by the federal government so you will always get what the loan promises; also, a Home Equity Conversion Mortgage (HECM)

Fixed monthly loan advances - payments of the same amount that are made to a borrower each month

Home equity - the value of a home, subtracting any money owed on it

Home equity conversion - turning home equity into cash without having to leave your home or make regular loan repayments

Home Equity Conversion Mortgage (HECM) - the only reverse mortgage program insured by the Federal Housing Administration, a federal government agency

Home value limit – in the HECM program, the largest home value that can be used to determine a borrower’s loan advances

Initial interest rate - in the HECM program, the interest rate that is 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

Leftover equity - the sale price of the home minus the total amount owed on it and the cost of selling it; the amount the homeowner or heirs get when the house is sold.

LIBOR – the London Interbank Offered Rate, used as an interest rate index in the HECM program

Loan advances - payments made to a borrower, or to another party on behalf of a borrower

Loan balance - the amount owed, including principal and interest; capped in a reverse mortgage by the value of the home when the loan is repaid.
 
Lump sum - a single loan advance at closing

Margin - in the HECM program, the amount added to an interest rate index to determine the initial, current, and expected interest rates

Maturity - when a loan must be repaid; when it becomes "due and payable"

Model specifications - rules recommended by AARP for analyzing and comparing reverse mortgages

Mortgage - a legal document making a home available to a lender to repay a debt

Non-recourse mortgage - a home loan in which the borrower generally cannot owe more than the home's value at the time the loan is repaid

Origination - the process of setting up a mortgage, including preparing documents

Property tax deferral (PTD) - reverse mortgages that pay annual property taxes; usually offered by state or local governments

Proprietary reverse mortgage - a reverse mortgage product owned by a private company

Reverse mortgage - a home loan that gives cash advances to a homeowner, requires no repayment until a future time, and is capped by the value of the home when the loan is repaid

Right of recission - a borrower's right to cancel a home loan within three business days of the closing

Servicing - administering a loan after closing, such as maintaining loan records and sending statements

Supplemental Security Income (SSI) - a federal monthly income program for low-income persons who are aged 65+, blind, or disabled

Tenure advances - fixed monthly loan advances for as long as a borrower lives in a home

Term advances - fixed monthly loan advances for a specific period of time

Total Annual Loan Cost (TALC) rate - the projected annual average cost of a reverse mortgage including all itemized costs

AARP does not endorse any reverse mortgage lender or product.

Updated Fall 2012

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