KEY REVERSE MORTGAGE TERMS
These are a few key terms that you should be familiar with when researching a reverse mortgage loan.
If you are confused by any the terminology call us at 805-738-8326 and a Reverse Mortgage Expert can answer all of your questions.
Interest Rate
This is the interest rate that you pay on the outstanding balance of a reverse mortgage.
There are two types of interest rates for a reverse mortgage:
#1 Fixed rate: the interest rate never changes over the life of the mortgage
#2 Adjustable rate: the rate is subject to change, and potentially increase over the life of the mortgage
The higher the interest rate, the lower the reverse mortgage amount you qualify for and the more the reverse mortgage balance increases over time The lower the interest rate, the higher the reverse mortgage amount you qualify for and the less the reverse mortgage balance increases over time.
Maximum Claim Amount
This is the value of the property you are mortgaging up to the FHA mortgage limit in your county.
So, if the property value is $750,000 and the FHA mortgage limit in your county is $679,650, then the maximum claim amount is $679,650.
Initial Principal Limit
This is the size of reverse mortgage you initially qualify for based on your age, reverse mortgage type, interest rate and property value.
The initial principal limit is calculated using an FHA formula and is typically between 50% and 60% of the property value.
If you select a fixed rate reverse mortgage, you receive a disbursement of 60% or less of the initial principal limit when the mortgage closes and no additional proceeds. If you select an adjustable rate reverse mortgage, you receive a disbursement of 60% or less of the initial principal limit when the mortgage closes and after a one year waiting period you are able to receive the remainder of the proceeds up to the initial principal limit amount.
Initial Advance
The is the amount of money you receive up-front when the mortgage closes after paying closing costs and paying off any existing mortgages on the property.
Lien Payoffs
You are required to pay off any existing liens or mortgages on the property with the proceeds of the reverse mortgage.
Financed Closing Costs
When you get a reverse mortgage, you are required to pay closing costs similar to a normal mortgage such as a lender origination fee, appraisal report fee as well as escrow and title costs.
The lender, escrow and title costs are typically financed which means they are included in the loan amount and paid for with the initial proceeds from the reverse mortgage.
You are typically required to pay for the cost of the appraisal report and the FHA-required reverse mortgage counseling class up-front.
Beginning Mortgage Balance
Your initial loan balance on your reverse mortgage when it closes
The beginning mortgage balance typically equals closing costs plus any existing mortgage balances on the property you pay off plus the amount of money you receive.
Initial Line of Credit
Depending on the type of reverse mortgage program you select and the amount of proceeds you elect to receive when the loan closes you may have access to a line a credit that allows you to draw down or pay back an amount of your choosing, up to the maximum amount of the line of credit, until the line is exhausted.
Mortgage Insurance Premium
The borrower is required to pay an up-front and ongoing FHA Mortgage Insurance Premium (MIP).
The borrower does not pay for either of these fees out of pocket as the up-front MIP is included in the closing costs which are financed as part of the reverse mortgage and the ongoing annual fee is added to the mortgage balance.
The upfront FHA MIP for a reverse mortgage is 2.0% of the maximum claim amount (the maximum claim amount is the value of the property you are mortgaging up to the FHA mortgage limit in your county). The ongoing annual FHA MIP for a reverse mortgage is 0.5% of the outstanding mortgage balance, calculated on a monthly basis.
Mortgage Payment
With a reverse mortgage, the borrower never makes a mortgage payment.
Monthly Servicing Fee
This is a monthly fee charged by the lender to process and service the reverse mortgage.
The servicing fee is typically included in the interest rate and the borrower does not pay the fee separately.
Expected Property Appreciation Rate
This is the expected annual rate of property value increase used to project what your property will be worth in the future.
Your future projected property value minus your future projected reverse mortgage balance equals your equity.
The equity in your property is the value of your property minus the amount of any mortgages you have on the property, so it is basically the financial value of your ownership of the property. A higher expected appreciation means that the property value will increase more in the future.
If the expected appreciation rate is higher than the reverse mortgage interest rate then the value of the property grows faster than the loan balance and the borrower is building equity in the property.
If the expected appreciation rate is lower than the reverse mortgage interest rate then the value of the property grows slower than the loan balance and the borrower is losing equity in the property. Borrowers should be aware of lenders that use a high expected appreciation rate (4% or higher).
Borrowers should use a more conservative appreciation rate (3% or lower) or contact a real estate agent to understand the expected property appreciation rate in your area.
The example below shows how the expected property appreciation rate impacts your projected future equity with a reverse mortgage.
Life Expectancy Set Aside
If the borrower does not demonstrate sufficient income to pay for property tax and homeowners insurance or has poor credit, the lender sets aside a certain portion of the reverse mortgage proceeds to pay for these expenses.
The amount of the Life Expectancy Set Aside is based on the borrower's age and expected property tax and insurance costs. The younger the borrower and higher the costs, the higher the set aside.
Life Expectancy Set Aside can be tens of thousands of dollars and take up a significant portion of a borrower's reverse mortgage proceeds.