In my previous post (here), I began to lay out in the plainest language possible, the most important terms and industry lingo related to reverse mortgages that require your understanding even before you decide to take the plunge and apply for a HECM loan.
In today’s follow-up to that post, I’m going to continue on, providing more “Plain English” definitions for your use and reference.
In fact, as I mentioned last time, please feel free to print these posts out and carry them with the rest of your reverse mortgage research so that you have them at your fingertips in the event that their meanings escape you.
One of the most important weapons you can arm yourself with when dealing with mortgage lenders is information – and the more you have at your immediate disposal, the better you will fair in any business transaction.
I’d also like to reiterate my ongoing message that the best approach to any endeavor such as this, having a significant impact not only on your finances but your future lifestyle, is to educate yourself by researching the topic.
Now I wouldn’t say that’s its necessary to have a “professional” level understanding of each topic that I discuss, but it will behoove any potential borrower to carve out a fraction of their normal schedule to review the material I’ve posted prior to making any moves towards securing a reverse mortgage.
That mere pittance of time will reap huge rewards – not only in dollars (thousands potentially), but in the sheer peace of mind that you will have knowing you have made the best possible decision for you and your family.
And with that in mind, let’s continue on and tackle some additional vocabulary you will need to know to become a savvy reverse mortgage investor…
What Should I Know About Reverse Mortgage Costs, Interest, & Fees?
Just as I did in Vol. 1 of this topic, I will lay out important terms in a categorical fashion so that you can reference all associated subject-related terminology when you find that you need clarification on a particular topic.
In this section, we’ll review the terms related to “Cost, Interest, & Fee” language that you should be familiar with.
Variable Interest Rate (Plain English):
- A variable interest rate is one that doesn’t remain static throughout the life of the loan.
- It can fluctuate to a higher or lower interest rate on a monthly or yearly interval depending on what the rules of the loan dictate.
- This means that the rate at which interest accrues on your loan can change depending what the variable rate is at any given time.
Fixed Interest Rate (Plain English):
- A fixed interest rate is the exact opposite of a variable interest rate.
- It remains static over the life of the loan.
- This means that the rate that interest accrues on your loan will remain the same over the life of your loan.
Annual Percentage Rate (APR) (Plain English):
- The APR is not the actual interest rate (see below) that will be applied to your loan balance.
- The APR is a calculation that represents the total cost of fees and interest on the loan, represented as a yearly percentage.
- This is a good tool for comparing the overall costs of different reverse mortgage products.
Index (Plain English):
- The “index” is a standardized interest rate that your reverse mortgage interest rate will be based on.
- Reverse mortgage interest rates are usually tied to the LIBOR (London Interbank Offered Rate) or the CMT (Constant Maturity Treasury rate).
Margin (Plain English):
- A “margin” is an amount added to the index rate to determine what your reverse mortgage “Expected” and “Actual” interest rate (see below) will be.
- This amount will be figured out by the lender.
Expected Interest Rate (Plain English):
- This is the rate primarily used to determine what your principal borrowing limit will be.
- Normally, it is determined by taking either the 10 year CMT or 10 year LIBOR rate and adding a margin.
Actual Interest Rate (Plain English):
- Sometimes referred to as the “Initial Interest Rate”.
- Your “actual” interest rate is the rate that will be charged as agreed upon at closing of the reverse mortgage.
- It will be determined by taking either the 1 month LIBOR, 1 month CMT, or 1 year CMT and adding a margin.
- Remember, this rate can vary over time if you have chosen to invest in a variable rate HECM loan.
Total Annual Loan Cost (TALC) Rate (Plain English):
- This is not an interest rate, rather it’s a figure that is calculated to give you information about what your yearly costs will be related to a particular reverse mortgage product.
- This information becomes useful when comparing different loan products and finding the one that fits your needs.
Origination Fee (Plain English):
- Lenders can charge a fee for processing your reverse mortgage application.
- Regulatory stipulations state that they can charge 2% for the first $200k of a home’s value and 1% for everything above that.
- Currently, these types of fees are limited to a maximum of $6,000 per loan.
Monthly Service Fee (Plain English):
- This is the fee that a loan servicer will charge to do the following:
- Maintain loan records.
- Provide account statements.
- Provide customer service.
- These fees are not normally billed to the customer on a monthly basis, rather they are paid up-front, by “setting them aside” from the principal loan limit at closing (see below).
Set Aside (Plain English):
- This is a small portion of your loan proceeds based on what the projected servicing fees will be over the life of your loan.
- This amount is “set aside” or charged at closing rather than billing you monthly for them.
- While they are collected from you via your loan as a lump sum, they are paid out monthly to the loan servicer,
- They are basically kept in escrow and distributed automatically so that you don’t have to pay them yourself
Closing Costs (Plain English):
- These are the costs associated with your reverse mortgage that must be satisfied by you (the borrower) before your loan can close and the funds can be disbursed.
- Closing costs can include:
- Title insurance
- Appraisal fees
- Inspection fees
- Escrow fees
- Credit reporting fees
- Legal fees
- Origination fees
- In certain situations, a lender can waive certain costs to make the closing process less costly.
- In many cases, closing costs can be covered with the proceeds from the reverse mortgage.
And that’s where we will stop for today.
As usual, I don’t want to force feed you information via firehose and leave you tired or confused, so I’ll continue with additional, useful terms in a subsequent post.
For now, the terms above will be more than helpful in assisting you with your initial reverse mortgage research and in person consultations.
Any Other Reverse Mortgage Terms I Should Know?
The simple answer is yes.
There are some other words and phrases I will touch on in a subsequent post that may come up through discourse with your reverse mortgage provider that may be useful to understand, but for now, you’re set to begin your journey.
While you as a borrower will never be required to understand the ins-and-outs of the business or the inner-workings of the financial processes behind your loan, I have found that most clients feel better when they get the “gist” of things.
In scenarios such as shopping for a long-term financial solution akin to a reverse mortgage, always take the time to educate yourself to the point of satisfaction prior to signing on the dotted line.
I can’t stress enough that the most valuable commodity that you will gain from spending the time to do this is peace of mind.
And that sort of contentment is truly invaluable.
In the meantime, if I have missed any important terms that you are curious about or if there is more you would like to know about the material I have posted, please feel free to contact me anytime day or night.
As always, I can be contacted 24 hours a day via email ([email protected]) or by clicking on the button below.
If you would like to have a more in-depth conversation or get the ball rolling with your own reverse mortgage, you can also call me locally at (972) 803-3073 or via my toll-free number at (800) 304-4143.