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Reverse mortgage glossary: Terms and definitions borrowers need to know
In this article:
- 60% utilization rule
- Appraisal
- Cash-out refinance
- Consumer Financial Protection Bureau (CFPB)
- Closing costs
- Co-borrower
- Debt-to-income ratio (DTI)
- Default
- Deed-in-lieu of foreclosure
- Due and payable
- Eligible non-borrowing spouse
- Federal Housing Administration (FHA)
- Financial assessment
- Fixed vs. variable rate
- Foreclosure
- Good faith estimate (GFE)
- HECM-certified counselor
- HECM lending limit
- Heirs
- Home equity
- Home equity agreement (home equity contracts)
- Home Equity Conversion Mortgage (HECM)
- Home Equity Conversion Mortgage (HECM) for purchase
- Home Equity Line of Credit (HELOC)
- Home equity loan
- Homeowners insurance
- HomeSafe
- HomeSafe Second
- Interest rate
- Initial principal limit
- Jumbo reverse mortgage
- Lien
- Life Expectancy Set Aside (LESA)
- Line-of-credit growth feature
- Loan-to-Value (LTV) ratio
- Loss mitigation
- Manufactured home
- Maximum claim amount
- Monthly service fees
- Mortgage Insurance Premium (MIP)
- National Reverse Mortgage Lenders Association (NRMLA)
- Negative amortization
- Net principal limit
- Non-borrowing spouse
- Non-recourse loan
- Origination fee
- Payout options
- Prepayment penalty
- Principal limit
- Principal Limit Factor (PLF)
- Principal residence
- Property charges
- Proprietary reverse mortgage
- Refinancing a reverse mortgage
- Reverse mortgage line of credit
- Reverse mortgage payout options
- Right of rescission (three-day right of rescission)
- Second-lien reverse mortgage
- Second mortgage
- Servicer
- Single-purpose reverse mortgage
- Third-party counseling
- Tenure payment
- Title insurance
- Total Annual Loan Cost (TALC) disclosure
- Traditional mortgage
- Underwater loan
- Youngest borrower
60% utilization rule
A factor that limits upfront borrowing. In Home Equity Conversion Mortgage (HECM) loans, a borrower who selects a single lump sum disbursement cannot exceed (a) 60% of the initial principal limit during the first 12 months of the loan or (b) mandatory obligations plus 10% of the principal limit.
Appraisal
A professional, written opinion of a home’s value based on its features and the sale prices of comparable homes in the area. For reverse mortgages, this is one factor used to determine how much home equity a borrower may access.
Cash-out refinance
A mortgage refinance that replaces an existing traditional mortgage with a new loan for more than the current balance, with the difference paid to the borrower in cash. A cash-out refi also resets the loan terms.
→ Learn more: What is a cash-out refinance?
Consumer Financial Protection Bureau (CFPB)
An independent government agency created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to protect consumers in financial markets. It writes and enforces rules for mortgages and other consumer loans, supervises lenders, and provides educational resources for borrowers.
Closing costs
The fees paid at closing to complete a loan, including origination fees, appraisal fees, title insurance, and mortgage insurance. For reverse mortgages, these costs are often paid from the loan proceeds, which limits the amount of home equity available and increases the loan balance over time.
→ Learn more: Reverse mortgage fees: What costs should you expect?
Co-borrower
A person, usually a spouse or partner, who signs the reverse mortgage note, meets eligibility requirements, shares responsibility for the loan obligations, and receives the loan proceeds. A co-borrower can generally remain in the house after the other borrower’s death, as long as they continue to meet the loan terms.
Debt-to-income ratio (DTI)
A percentage that compares a borrower’s monthly debt payments to their gross monthly income. Lenders often use this to judge whether a borrower can afford additional debt. Reverse mortgages typically do not require monthly mortgage payments, so DTI tends to matter less than it does for a traditional mortgage. Lenders do perform a financial assessment to review a borrower’s debts, income, and ability to keep up with property charges.
The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
Default
Failing to meet a loan’s requirements. For a reverse mortgage, those requirements include, but are not limited to, living in the home as your principal residence, keeping it in good repair, maintaining an insurance policy, and paying property charges on time. Default can lead to foreclosure.
Deed-in-lieu of foreclosure
An arrangement in which the borrower voluntarily transfers the home’s ownership to the lender to avoid the foreclosure process. Lenders must agree to accept the transfer, and they typically require that the home be free of other liens or have those liens addressed. This can negatively impact the borrower’s credit.
Due and payable
The point at which the full loan balance must be repaid. For a reverse mortgage, this is typically triggered by events such as the borrower’s death, the borrower permanently moving out, or the sale of the home. Failing to meet the loan terms may also cause the reverse mortgage to become due and payable.
Eligible non-borrowing spouse
The spouse of a reverse mortgage borrower who is not listed on the mortgage but meets specific eligibility requirements. To be eligible, the non-borrowing spouse generally must have been married to the borrower when the loan was applied for and closed, and must remain married and living in the home until the borrower’s passing or relocation to a medical facility.
→ Learn more: A non-borrowing spouse’s guide to reverse mortgages
Federal Housing Administration (FHA)
A government agency within the U.S. Department of Housing and Urban Development (HUD). It insures mortgages made by approved private lenders, including the Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage. FHA insurance protects lenders against losses and sets the requirements that borrowers and lenders must meet for those loans.
Financial assessment
A step during the reverse mortgage application process where the lender reviews the borrower’s financial history, including credit and employment history, debts, and income. For reverse mortgages, this step helps ensure the borrower can continue to meet the loan terms over time.
Fixed vs. variable rate
Fixed vs. variable rate refers to the interest structure of a loan. A fixed-rate reverse mortgage keeps the same interest rate for the life of the loan. A variable-rate reverse mortgage adjusts monthly or annually. Variable rates may rise or fall, which can affect how quickly the reverse mortgage loan balance grows. Both fixed- and variable-rate reverse mortgage loan balances grow over time.
Foreclosure
The legal process in which the lender takes back the property after the borrower fails to meet the loan obligations. Foreclosure processes differ by state, but typically have a negative impact on borrowers’ credit scores.
Good faith estimate (GFE)
A standardized form that a lender must give borrowers when they apply for a reverse mortgage. It summarizes the terms and costs of the loan offer.
HECM-certified counselor
A type of financial counselor who has completed an approved HECM training course and is certified by the U.S. Department of Housing and Urban Development. Sometimes referred to as a HUD-certified counselor.
HECM lending limit
The maximum amount that can be used to calculate a Home Equity Conversion Mortgage (HECM), set by the Federal Housing Administration (FHA) and adjusted each year. It is also called the maximum claim amount. For homes valued above this limit, the value used in the calculation is capped at the limit, so a borrower’s principal limit cannot exceed what it would be on a home worth the limit amount. For 2026, the HECM lending limit is $1,249,125.
Heirs
The people who inherit the property after the borrower dies. Heirs may inherit a home with a reverse mortgage loan and must ensure the loan is repaid, typically by selling the home or refinancing it. The lender cannot pursue the heirs’ personal assets for the loan.
→ Learn more: Are heirs responsible for reverse mortgage debt?
Home equity
The current value of a home minus the amount owed on any mortgages or liens against it. In a reverse mortgage, this equity is what the borrower can access, in part or in full, depending on the loan.
Home equity agreement (home equity contracts)
A contract in which an investor gives a homeowner a lump-sum payment in exchange for an agreed-upon portion of the home’s future value. When the agreement ends, typically after a set period or when the home is sold, the homeowner repays the investor in accordance with its terms.
Home Equity Conversion Mortgage (HECM)
HECM is the only type of reverse mortgage insured by the FHA. Eligible homeowners may borrow against their home equity with no monthly mortgage payments, as long as they meet the ongoing obligations. The loan is typically repaid when the homeowner sells, moves out, or passes away.
The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
Home Equity Conversion Mortgage (HECM) for purchase
A reverse mortgage that is used to buy a new home. Instead of accessing existing equity, it requires a substantial down payment, and the HECM pays the rest of the purchase price. Like other reverse mortgages, it does not require monthly mortgage payments and is typically repaid when the borrower moves out, dies, sells the home, or can no longer meet the loan terms.
→ Learn more: What is a HECM for purchase?
The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
Home Equity Line of Credit (HELOC)
A revolving line of credit secured by your home’s equity. Unlike a reverse mortgage, a HELOC typically requires monthly mortgage payments. Borrowers can draw funds as needed during the draw period, when payments are often interest-only. During the repayment period, payments increase to cover both interest and principal.
→ Learn more: Is a HELOC a good idea?
Finance of America does not offer home equity lines of credit.
Home equity loan
A fixed-amount, lump-sum loan secured by the equity in your home. You borrow funds against the difference between the home’s value and what you still owe on your mortgage, and repay it in fixed monthly installments over a set term. Because your home secures the loan, the lender can foreclose if you default.
→ Learn more: Home equity loan vs a reverse mortgage
Homeowners insurance
Insurance that covers losses and damage to your home from events such as fire or theft. It typically doesn’t cover floods or earthquakes, though coverage for those events can often be added. HECM borrowers must maintain a homeowners insurance policy and mortgage insurance. Most reverse mortgages offered by proprietary lenders also require borrowers to retain coverage.
HomeSafe
A proprietary reverse mortgage offered by Finance of America. It is not insured by the FHA and is not related to the Home Equity Conversion Mortgage (HECM) program. HomeSafe loans can exceed HECM limits, with some products lending up to $4 million. Eligible borrowers generally must be at least 55 years old, though the minimum age is higher in some states. HomeSafe products are available only in certain states.
HomeSafe Second
A second-lien reverse mortgage in the HomeSafe family, offered by Finance of America. It allows eligible homeowners to borrow against their home equity while keeping their existing first mortgage in place, so the borrower doesn’t have to give up a low interest rate on that loan. HomeSafe Second has no required monthly mortgage payment, though borrowers must continue paying their first mortgage, property taxes, and homeowners insurance.
→ Learn more: What is HomeSafe Second?
The borrower must meet all loan obligations, including meeting all loan obligations under the first lien mortgage, living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
Interest rate
The percentage rate charged on the outstanding balance of a loan. Reverse mortgages may have fixed or adjustable interest rates, depending on the loan product. Interest accrues on the outstanding loan balance and is generally added to the balance over time, increasing the amount owed unless sufficient voluntary payments are made.
Initial principal limit
The maximum amount of loan proceeds a borrower could access at the start of a reverse mortgage, before any closing costs are deducted. It is calculated by multiplying the principal limit factor by the home’s maximum claim amount. The initial principal limit is the starting point for the 60% rule, which limits how much a borrower can take as a lump sum during the first 12 months of a HECM.
Jumbo reverse mortgage
A proprietary reverse mortgage for higher-value homes whose loan amounts exceed the FHA’s HECM lending limit. It is not insured by the FHA and is not connected to the HECM program.
→ Learn more: What is a jumbo reverse mortgage?
Lien
A legal claim against a property used to secure a debt. A lien gives the lender the right to be paid from the home’s value through foreclosure if the debt isn’t repaid when due. Most mortgages are liens, including reverse mortgages.
Life Expectancy Set Aside (LESA)
An amount “set aside” from loan proceeds to cover insurance and property tax obligations if the lender determines the borrower may have difficulty meeting reverse mortgage eligibility requirements.
→ Learn more: What is a LESA?
Line-of-credit growth feature
A feature of some reverse mortgages and HELOCs that lets the available line of credit increase over time under the loan agreement’s terms. Not all reverse mortgages offer this feature.
→ Learn more: What is a reverse mortgage line of credit and how does it work?
Loan-to-Value (LTV) ratio
The loan amount as a percentage of the home’s appraised value. A lower LTV means more equity remains in the home.
LTV (loan-to-value) ratio = (Loan amount ÷ Appraised home value) × 100
Example: A $150,000 loan on a home appraised at $300,000:
($150,000 ÷ $300,000) × 100 = 50% LTV
Loss mitigation
The steps a mortgage servicer takes to help a borrower avoid foreclosure. Options may include a repayment plan or a deed-in-lieu of foreclosure. Some options help borrowers stay in their home, while others help them leave without a foreclosure.
Manufactured home
A factory-built home, often called a mobile home, that may be eligible for a reverse mortgage if it meets FHA requirements, such as being built to HUD standards and placed on a permanent foundation.
→ Learn more: Can I get a reverse mortgage on a mobile home?
Mandatory obligations
For a reverse mortgage, these are the required costs and financial obligations that must be paid or set aside at closing. These may include paying off existing mortgages or liens, closing costs, mortgage insurance premiums, and required set-asides for property taxes and homeowners insurance. Mandatory obligations reduce the amount of loan proceeds initially available to the borrower.
Reverse mortgage borrowers are not required to make monthly mortgage, principal, and interest payments, but may make voluntary payments.
The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
Maximum claim amount
One factor that impacts how much you can borrow with a reverse mortgage. It is the lesser of the home’s appraised value, the purchase price if buying the home, or the maximum loan limit that FHA will insure.
Monthly service fees
Fees the loan servicer charges after closing to administer the loan, such as disbursing funds, maintaining records, and sending statements.
Mortgage seasoning
The minimum period of time a loan must be in place before it can be refinanced or used to pay off another lien. For reverse mortgages, HUD typically requires an existing non-HECM lien, such as a HELOC or cash-out loan, to be in place for at least 12 months before HECM proceeds can pay it off, unless the borrower received less than $500 from it.
Mortgage Insurance Premium (MIP)
The upfront and annual premiums charged to a borrower for mortgage insurance on a HECM. In addition to guaranteeing the loan to the lender, this premium enables the FHA to insure HECMs against default.
National Reverse Mortgage Lenders Association (NRMLA)
A trade organization that provides guidance, resources, policies, and lobbying efforts for the reverse mortgage industry.
Negative amortization
A loan structure in which the loan balance grows over time, typically due to low or no monthly payments. A reverse mortgage is a negative amortization loan, meaning the loan balance rises each month as interest and fees accrue, unless the borrower makes voluntary payments. Repayment is typically deferred until the home is sold, the owner passes away, or no longer has primary residency.
Net principal limit
The maximum amount of funds available to a reverse mortgage borrower after upfront costs are deducted from the principal limit. Upfront cost examples can include the origination fee, the upfront mortgage insurance premium, closing costs, and any existing liens paid off at closing. Because these costs are subtracted, the net principal limit is typically lower than the principal limit.
Non-borrowing spouse
In a reverse mortgage, the non-borrowing spouse is a spouse who is not on the loan documents. They may be eligible or ineligible, which may affect their ability to remain in the home after their spouse passes or moves out.
→ Learn more: A non-borrowing spouse’s guide to reverse mortgages
Non-recourse loan
A feature that means the borrower, heirs, or estate will not owe the lender more than the home’s value when the home is sold to settle the loan. If the home is worth less than the loan balance, the borrower’s or heir’s other assets are not used to cover the difference. HECMs are non-recourse loans, but not all reverse mortgages carry this borrower safeguard.
Non-recourse means that if you default on the loan, or if the loan cannot otherwise be repaid, the lender cannot look to your other assets (or your estate’s assets) to meet the outstanding balance on your loan. The loan can only be satisfied through the value of your property.
Origination fee
The upfront fee a lender charges to originate the loan. The lender can charge the greater of $2,500 or 2% of the first $200,000 of the home’s value, plus 1% of the amount above $200,000. For HECMs, origination fees are capped at $6,000.
Payout options
The different ways a reverse mortgage borrower may choose to access their home equity. Options include lump sum, monthly payments, a line of credit, or a combination of these. Monthly payments may be for life or over a set term. Payout options may vary by lender and loan type.
→ Learn more: Understanding reverse mortgage payout options
Prepayment penalty
A charge for paying off a loan early. HECMs typically have no prepayment penalty, so you can repay all or part of the loan early without a fee. Proprietary reverse mortgages may or may not have a prepayment penalty. Check your loan documents for more information.
Principal limit
The maximum amount a borrower can access from a reverse mortgage. It’s based on several factors, including the age of the youngest borrower, the interest rate, and the maximum claim amount. Older borrowers, higher-value homes, and lower interest rates generally produce higher principal limits.
Principal Limit Factor (PLF)
The percentage used to calculate the principal limit. It depends on the borrower’s age and the interest rate, and it’s applied to the home’s value up to the lending limit.
Principal residence
The home where the borrower and the non-borrowing spouse, if applicable, permanently live and spend most of the year. A borrower can have only one principal residence at a time.
Property charges
Obligations the borrower must pay, including property taxes and homeowners insurance. Depending on the property, they can also include flood insurance, ground rent, condo or HOA fees, and special assessments. Paying them on time is a HECM requirement.
Proprietary reverse mortgage
A reverse mortgage that is not insured by the federal government and is offered by private lenders. These loans are typically designed for borrowers with higher-value homes and can lend more than the federal limit. They may also be available to younger borrowers.
Refinancing a reverse mortgage
Replacing an existing reverse mortgage with a new one, often to access more funds or change loan terms. New closing costs typically apply.
→ Learn more: Can you refinance a reverse mortgage?
Reverse mortgage
A home loan that may allow older homeowners to borrow against their equity while still living in their homes. Borrowers receive loan proceeds as a lump sum, in monthly payments, as a line of credit, or as a combination of the three. Borrowers must maintain the home and pay property taxes, homeowners insurance, and other home-related charges, but they aren’t required to make monthly mortgage payments.
→ Learn more in our guide: What is a reverse mortgage and how does it work?
The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
Reverse mortgage line of credit
A reverse mortgage payout option in which the borrower sets aside a portion of available equity as a line of credit that can be drawn on at any time. Unused funds don’t accrue interest. The available credit can grow over time at the same rate charged on the loan balance, which includes the interest rate plus the annual mortgage insurance premium (0.50% of the principal).
Available only for HECM reverse mortgage loans with the line of credit option selected by the borrower.
Reverse mortgage payout options
Borrowers can receive loan proceeds in several ways, including lump sum, line of credit, monthly installments, or a combination of these options. For installments, payments can be structured in four ways.
- Tenure: The borrower receives equal monthly payments as long as they live in the home and continue to meet loan obligations.
- Term: An equal amount each month is disbursed over a set period. Once that period ends, payments stop.
- Modified tenure: The borrower receives a fixed monthly payment as long as they remain in the home and meet loan obligations. The remaining equity is set aside as a line of credit.
- Modified term: The borrower receives a fixed monthly payment for a set period. The remaining equity is set aside as a line of credit.
Note: Not all reverse mortgages are the same. The type of loan you select could impact your payout options.
Right of rescission (three-day right of rescission)
The right of a borrower to cancel certain mortgage transactions within three business days after closing, without penalty. This generally applies to reverse mortgages, but not to those used to purchase a home (HECM for purchase). Borrowers must follow the required cancellation process within the three-day timeframe.
→ Learn more on the Consumer Financial Protection Bureau website.
Second-lien reverse mortgage
A reverse mortgage that sits behind an existing first mortgage on the home. The first mortgage stays in place, so the homeowner can keep a low interest rate on that loan while still accessing home equity. If the home is sold, the first mortgage is repaid before the reverse mortgage. Traditional reverse mortgages generally require the existing mortgage to be paid off at closing, so a second-lien option can be useful for homeowners with a low-rate first mortgage.
Second mortgage
A loan secured by your home that holds a second lien on your property. This means that, should a foreclosure occur, the first lien is paid in full, and the second lien is paid if any funds remain. Types of second mortgages include home equity lines of credit (HELOCs) and home equity loans.
→ Learn more: What is a second mortgage?
Finance of America does not offer HELOCs or home equity loans.
Servicer
The company that manages the loan day-to-day. It disburses payments or line-of-credit draws, sends statements, answers borrower questions, and tracks principal and interest. The servicer is usually a different company from the lender.
Single-purpose reverse mortgage
A type of reverse mortgage offered by state or local governments and some nonprofit organizations to pay for one specific purpose, such as property taxes or necessary home repairs. These loans are typically offered to older homeowners with lower incomes and are not insured by the FHA. Repayment typically occurs when the homeowner sells, moves out, or passes away, although terms may vary by program.
→ Learn more: What are the three types of reverse mortgages?
Third-party counseling
A type of financial counseling that the FHA requires HECM reverse mortgage applicants to attend before applying for a loan. An FHA-approved counselor explains the terms of the reverse mortgage, makes sure you understand how the loan works, and outlines alternatives to consider. Most proprietary reverse mortgage loans also carry this requirement.
→ Learn more: Reverse mortgage counseling: What to expect and why it’s required
Term payment
A reverse mortgage payout option where the borrower receives equal monthly payments for a fixed period selected by the borrower. At the end of that period, payments stop, even if the borrower is still living in the home. The payment amount is typically higher than a tenure payment over the same time, because the payments are spread over a fixed period rather than the borrower’s lifetime.
→ Learn more: Understanding reverse mortgage payout options
Tenure payment
A reverse mortgage payout option in which the borrower receives equal monthly payments for as long as they live in the home and continue to meet the loan obligations. Payments don’t end on a set date. Because the payments last for the borrower’s lifetime in the home, the total amount received depends on how long they remain there.
→ Learn more: Understanding reverse mortgage payout options
Title insurance
An insurance policy that protects the homeowner or lender against legal challenges or financial loss caused by title disputes or invalid mortgage liens. The borrower typically pays the premium at closing.
Total Annual Loan Cost (TALC) disclosure
A document that shows the projected annual cost of a reverse mortgage. Lenders are required to provide this disclosure, which illustrates the projected annual cost of a reverse mortgage, including principal, interest, and applicable fees, under different loan-duration and home-value assumptions
→ Learn more: What is the total annual loan cost (TALC) for reverse mortgages?
Traditional mortgage
A loan used to purchase a home. The borrower makes regular payments, typically monthly, and the loan balance decreases over time. Sometimes referred to as a forward mortgage when discussing reverse mortgages.
→ Learn more: Traditional vs. reverse mortgage: What’s the difference?
Underwater loan
When the loan’s balance exceeds the home’s value. For example, if you owe $200,000 on a home that is now valued at $180,000. This may also be called negative equity.
Youngest borrower
The youngest of the borrowers listed on the reverse mortgage’s loan documents. HECM age requirements and payout calculations are based on the youngest borrower’s age, which must generally be 62 or older. Proprietary reverse mortgages may have different rules.
About the author
is the Web Content Manager at Finance of America and a journalist with more than 10 years of experience whose work has appeared in MoneyWise, MSN, Yahoo! Finance, and The Motley Fool. She specializes in making complex financial topics accessible and is passionate about advancing financial literacy.
Disclaimer
This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For tax advice, please consult a tax professional. For more information about whether a reverse mortgage fits into your retirement strategy, you should consult your financial advisor.
