If you’re thinking about applying for a reverse mortgage, understanding the terminology involved can help you feel more confident throughout the process. Because this type of loan works differently from traditional mortgages, it’s essential to know what the terms mean before making any decisions. Whether you’re exploring your options or helping a family member, this glossary breaks down the most common reverse mortgage terms in a simple and helpful way.

What Is a Reverse Mortgage?

A reverse mortgage allows homeowners who meet the age requirement to borrow against the home equity while still living in the property. Rather than paying monthly for the mortgage, borrowers receive funds as a lump sum, line of credit, monthly installments, or a mix of all three. They must maintain the home and keep up with taxes and insurance, but there are no regular loan repayments until the home is sold or vacated.

Reverse Mortgage Line of Credit

Meanwhile, borrowers may choose to set up a reverse mortgage line of credit, which grows over time if not used. This option provides flexibility, allowing funds to be accessed as needed. Since unused credit lines do not accrue interest, many borrowers prefer this method for long-term financial planning.

Reverse Mortgage Payment Plans Explained

There are several ways to receive the proceeds from a reverse mortgage, each offering flexibility based on your financial goals. For instance, with the tenure option, borrowers receive equal monthly payments for as long as they continue living in the home. Alternatively, the term plan provides monthly payments over a set number of years, making it easier to plan short- to mid-term expenses.

For those who want a blend of consistency and flexibility, the modified tenure option offers monthly payments alongside a line of credit that grows over time. Similarly, the modified term provides fixed monthly payments for a set period, while also granting access to a credit line for additional needs. Together, these options help borrowers customize their reverse mortgage in a way that supports both immediate and future financial needs.

Understanding the 60% Rule in Reverse Mortgage Loans

Also called the 60% principal limit factor rule, this guideline limits how much a borrower can take out during the first year of a reverse mortgage in Columbia SC. Depending on the loan’s structure and any existing liens, the limit is either 60% of the principal amount or 10% more than the mandatory obligations.

Non-Recourse Loan Feature of a Reverse Mortgage

A reverse mortgage is considered a non-recourse loan. This means the borrower and their heirs won’t owe more than the value of the home at the time it is sold—even if the loan balance exceeds the market value. This protection helps reduce financial risk for families.

Proprietary Reverse Mortgage Loans

These are often referred to as jumbo reverse mortgage loans. Unlike traditional options, they are not insured by the federal government, which in turn allows lenders to offer them on higher-value properties. As a result, they come with significantly larger payout limits. However, it’s important to note that they also follow different rules and requirements compared to federally backed alternatives.

Federal Housing Administration (FHA)

The FHA is a government agency that backs Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage. It helps protect both borrowers and lenders by providing insurance and clear standards.

Home Equity Conversion Mortgage (HECM)

This is the only type of reverse mortgage that’s insured by the FHA. Additionally, it’s available to homeowners in Columbia SC who meet age and equity requirements. Since the federal government backs this loan, this mortgage type includes protections such as mandatory counseling and non-recourse terms.

HECM for Purchase

Rather than borrowing from home equity, a HECM for purchase helps qualified borrowers buy a new primary residence using a reverse mortgage. Typically, the borrower pays a portion of the home’s price as a down payment, and the loan covers the remainder.

Reverse Mortgage Mandatory Obligations

The borrower must cover these costs before they receive the proceeds from a reverse mortgage. Examples include existing liens, property taxes, homeowner’s insurance, and any other home-related charges required to keep the loan active.

Mortgage Insurance Premium (MIP)

This is a fee on every reverse mortgage. It helps ensure that the borrower receives their full benefits and that the lender gets protection, even if the home’s value declines over time.

Understanding the LESA (Life Expectancy Set-Aside)

Sometimes, a lender may require that a portion of the reverse mortgage funds be set aside. They will use it to cover future property taxes and insurance. This set-aside, called a LESA, is based on the borrower’s life expectancy and helps prevent default.

Financial Assessment Requirement

To confirm that the borrower can uphold the terms of the reverse mortgage, lenders conduct a financial assessment. This includes checking credit history, debts, income, and any red flags that might suggest the borrower is at risk of falling behind on home-related expenses.

The Role of an Eligible Non-Borrowing Spouse

If a borrower’s spouse is not listed on the reverse mortgage, they may still get protection if they meet certain FHA conditions. For example, they must be the spouse of the borrower at the time of application and continue living in the home.

Third-Party Counseling for Reverse Mortgage Applicants

Before applying for a reverse mortgage, borrowers must attend counseling with an advisor. Also, this ensures that they understand the loan’s structure, responsibilities, and alternatives before committing.

Total Annual Loan Cost (TALC) Disclosure

The TALC is a projection that shows the long-term cost of a reverse mortgage, including interest, fees, and insurance. Lenders must provide this document so borrowers can make informed decisions.

Understanding the Net Principal Limit

This refers to the maximum amount a borrower can access from their reverse mortgage. It’s the amount after all closing costs and mandatory obligations have been deducted. In effect, the net principal limit plays a key role. It helps determine how much cash or line of credit the borrower will ultimately receive. Therefore, it serves as a crucial figure when planning how to use the available funds.

The National Reverse Mortgage Lenders Association (NRMLA)

NRMLA is a trade association that supports the reverse mortgage industry through advocacy, education, and setting ethical standards. While not a regulatory body, it plays a major role in shaping industry practices.

Right of Rescission: Canceling a Reverse Mortgage

After signing the final documents, borrowers have the right to cancel their reverse mortgage within three business days. This period allows time for reflection and ensures that the decision was not made under pressure. If you have questions, consult Reverse Mortgage Specialist for professional assistance.

Ready to explore your reverse mortgage options? Call Reverse Mortgage Specialist now to speak with a specialist. Find out how your home equity could work for you.