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Reverse Mortgage Jargon – Frequently Used Terms

If you are like many homeowners who are realizing retirement is in the not-so-distant future, a reverse mortgage could be an excellent financial tool. Offered by the FHA and supported by HUD, reverse mortgages are for homeowners 62 years of age or older. To be eligible, reverse mortgage borrowers must have either paid off their mortgages entirely or have a substantial amount of equity, and reside in the home. Known as the Home Equity Conversion Mortgage or HECM program, FHA-backed reverse mortgages allow senior homeowners to take out a portion of their property’s equity to use however they like, allowing their home’s value to work for them. The homeowner has the payout options of withdrawing the funds through a line of credit, in a fixed monthly amount, a lump sum, or combination of these options.

As for repayment, it is required when either the last surviving homeowner moves out of the home or passes away. Their estate will then have a set period in which to repay the reverse mortgage balance. This is most often handled through a property sale. One of the benefits of an HECM is that the borrower’s estate or heirs are not held financially responsible if the home sells for less than what is owed on the reverse mortgage. If this happens, the FHA absorbs the loss.

In the event that the home sells for a profit, the estate/heirs inherit any remaining equity. Reverse mortgages are federally insured and have no income or credit requirements, making them a potential option for many older seniors on a fixed income.

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As with any loan or financial agreement, HECMs or reverse mortgages come with their own unique terminology. Here is a quick explanation of frequently used terms so that interested borrowers can familiarize themselves with this type of mortgage product:

  • FHA (Federal Housing Administration) — The government agency that offers HECM reverse mortgages and insures them. Any borrower taking out an HECM must do so only with an FHA-approved lender.
  • HUD (The U.S. Department of Housing and Urban Development) — Reverse mortgage borrowers are required to take part in HUD-approved consumer education sessions, presented by a certified HECM counselor.
  • HECM (Home Equity Conversion Mortgage) — This is the actual name of the reverse mortgage program offered by the FHA that enables Americans who are 62 years of age and older to convert some of the equity in their property into cash without having to make monthly mortgage payments or move out of their home.*
  • LOC/RMLOC (Reverse Mortgage Line of Credit— This is one of the three payout options for HECM borrowers.
  • HELOC (Home Equity Line of Credit) — This is an alternative to a reverse mortgage. HELOCs are similar to a reverse mortgage in that they both offer borrowers a line of credit through their equity. However, unlike a reverse mortgage, a HELOC must be repaid within a certain period of time. HECMs, aka reverse mortgages, do not need to be repaid unless the borrower moves out of the home, passes away, or fails to pay their homeowners insurance and/or property taxes. Also, with an HECM line of credit, any unused portion of the line grows month to month. Therefore, with an HECM line of credit, borrowers can potentially have a higher credit line the longer they go without using it. By contrast, a HELOC is for a set amount that doesn’t change.
  • FA (Financial Assessment) — Prospective HECM borrowers are required to have their credit history and financial history reviewed and approved before being granted a reverse mortgage.
  • MIP (Mortgage Insurance Premium) — Essentially, this is an insurance policy. The requirement of an MIP applies to any borrower using an FHA product who is putting down less than 20 percent on a home purchase.
  • IDL (Initial Disbursement Limit) — This term applies to the maximum amount of principal that is allowed at closing and through the first year of the loan.
  • LIBOR (London Interbank Offered Rate) — In financial circles, LIBOR is known as the “benchmark” rate that major banks worldwide charge each other for short-term loans. It also plays a role in how interest rates are calculated.

*HECMs require borrowers to continue to pay property taxes and homeowners insurance premiums. HECMs are called due when the last surviving borrower no longer uses the property as their primary residence.

To learn more about eligibility requirements and all the ways that a reverse mortgage could boost your financial freedom in the coming years, please contact one of our experienced loan consultants.

Learn more about how people are using home equity conversion mortgages for purchasing homes:

Please keep in mind that the reverse mortgage industry is constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.