Recently, I’ve had a few people ask me, “Brenda, why do you do this? What’s the point of writing this blog?”
Well, in plain and simple English:
The overall goal of providing this resource for borrowers is to provide you (the borrower or prospective reverse mortgage investor) with a comprehensive knowledge base of easily referenceable articles that you can click over to at a moment’s notice when you’re doing your reverse mortgage research.
For those of you who frequent this site to get more information about an intended investment in a reverse mortgage, you’ll know that I normally provide a detailed account on a topic of interest relevant to your queries as well as some accompanying advice on how to utilize certain strategies to augment your retirement cashflow more effectively.
So, that’s that…
But the reason I bring it up at all is that I want to go a different direction today and provide you with a useful list of terms that you can print or link to when you’re working your way through the reverse mortgage process.
No matter how prepared a potential borrower is coming into a meeting with a reverse mortgage professional, it has been my experience there are always “industry” terms that are still confusing.
For that reason, I’m going to take the time today to provide you with a cheat sheet – deciphered into plain American English – so you can carry it with you to make understanding the terminology associated with reverse mortgages a whole lot easier.
While I’ve covered most of these terms in previous articles, it’s important to have easy-to-access tools at your fingertips when you’re going in to a meeting with a reverse mortgage originator or with the lender.
You will want to make sure to study the terminology and industry lingo that they throw around (or at least skim through it) so that you don’t get confused in the conversation and so that the details of your loan aren’t lost in translation.
Remember, you are the first and last line of defense when it comes to making solid, well informed decisions about your retirement and finances.
There is absolutely no shame in carrying around printouts and cheat sheets that help you hang in there with professionals – it shows that you are taking this investment seriously, that you’re prepared, and that you won’t stand for anybody attempting to mislead you in any way, shape, or form.
And now that we’re all fired up, let’s learn the lingo in Plain English…
What are the Most Important Reverse Mortgage Terms
I Should Know?
Rather than provide you with a traditional, alphabetical listing of reverse mortgage industry terminology, I’m going to provide you with what’s important first and what’s simply “good-to-know” as a follow-up.
Again, this piece is for your reference – feel free to print it out and use it at your leisure…
Reverse Mortgage (Plain English):
- A reverse mortgage is a loan drawn from the equity in your home designed for borrowers 62 years of age or older.
- It’s a “reverse” mortgage because unlike traditional mortgages, you don’t make a monthly payment to the lender or bank to satisfy your repayment obligation, rather the bank collects what they’re owed by you after you die or when you sell the property.
- Thus, satisfying repayment of the loan happens in “reverse”.
HECM or Home Equity Conversion Mortgage (Plain English):
- This is the technical term for a “Reverse Mortgage”.
- It means that you’re taking the equity you’ve built up in your home and converting it into a mortgage that you can draw funds from for personal use.
- This is in many ways similar to a HELOC (Home Equity Line of Credit) – a traditional mortgage product allowing borrowers to take a loan against their property equity.
- The difference between a HELOC and a HECM is that the HECM repayment happens in “reverse” – after you die or sell the property.
HUD or Department of Housing and Urban Development (Plain English):
- This is the federal agency whose mandate is to promote home ownership.
- HUD developed and created the rules/stipulations for the HECM loan, so when those rules are changed or updated, it’s HUD that’s responsible.
FHA or Federal Housing Administration (Plain English):
- The FHA is a department within HUD that provides insurance of HECM loans for those lenders who are “FHA approved”.
- This means that if for some reason, the lender fails in their responsibility to provide a borrower with funds as agreed upon in the loan contract, the FHA steps in an insures that the loan is paid out to the borrower (and vice-versa for the lender).
PLL or Principal Loan Limit (Plain English):
- This is the amount of money that you are qualified to borrow from the lender.
- It is figured by taking into account your age, current interest rates, and the MCA (Maximum Claim Amount – see below).
MCA or Maximum Claim Amount (Plain English):
- This is a number based on the value of your home that your lender uses to determine what your PLL should be.
- They will either utilize the appraisal value of your home (at the time of application) or the FHA maximum lending limit of $625,500 (this will increase to $636,150 as of 1/1/2017) – whichever amount is lesser as your MCA.
- Then they will factor the MCA, along with your age, and current interest rates to determine what PLL you qualify for (see above).
MIP or Mortgage Insurance Premium (Plain English):
- Just like car, home owner’s, or life insurance, the mortgage insurance that the FHA provides (see above) has a premium that needs to be paid.
- The insurance provided by the FHA protects the borrower in case they become upside down on the loan (loan exceeds value of the home) or if the lender goes out-of-business.
- It protects the lender if the borrower defaults on the loan by not holding up their end of the loan contract. This is a necessary cost associated with reverse mortgages.
Reverse Mortgage Lender (Plain English):
- The lender is a bank or financial institution that provides you with the reverse mortgage funds.
- Lenders must be approved by HUD (see above) to provide HECM loans to qualified borrowers.
- It’s also a good idea to make sure that the lender you’re dealing with is FHA approved (see above) to offer HECM loans that are insured against failure.
Reverse Mortgage Originator (Plain English):
- A reverse mortgage originator should be your first point of contact and will be your most valuable resource when shopping for a HECM loan.
- Often, they are independent business people who work in conjunction with lenders to market and offer reverse mortgage opportunities to those who are in search of one for their financial planning purposes.
- Originators work with lenders to coordinate nearly every piece of the qualification process for new borrowers.
- They also act as a loan counselor, providing the following services:
- Educate borrowers about the product and its specifics.
- Help clients find the most appropriate loan for their financial situation.
- Assist with necessary paperwork, loan packaging, and review of application.
- Facilitate the processing of the loan.
- Answer any questions and address all concerns that a borrower may have about the HECM loan or the reverse mortgage process.
What Other Reverse Mortgage Terms Should I Know?
The terms listed above are a good start – take some time to digest them and formulate some questions.
There are also a handful of ancillary terms that relate to the major reverse mortgage themes described above that you will need to be familiar with to navigate your way successfully through the research and application process.
Because I like to make sure not to inundate readers with too much in one sitting, I’ll break here and follow with an additional post dedicated to those terms and lingo in my next article.
Remember, knowledge is key when shopping for a complex and important product that will have an integral impact on your future lifestyle and finances.
Take the time to familiarize yourself with these terms and make sure to practice using them when speaking with reverse loan originators and lenders so that they know you’ve done your homework.
In the meantime, if you’re confused by anything related to reverse mortgages or their associated terminology, never hesitate to ask questions of professionals in the field.
I can be contacted any time of the day via email ([email protected]) or by clicking on the button below.
Or if you need a response more quickly, feel free to call me locally at (972) 803-3073 or via my toll-free number at (800) 304-4143.