When you are about to retire, you may qualify for a particular type of home loan. Known as a reverse mortgage, it is a loan that can benefit you more than a traditional mortgage. However, it is also a loan that comes with its own unique vocabulary. Understanding the words you will hear when negotiating a reverse mortgage agreement is essential. You need to be aware of all potential pros and cons of the reverse mortgage process. There is no way to understand that information when some of the words you hear are unfamiliar to you. Here is a brief description of common reverse mortgage vocabulary terms and what they may mean to you.
What “Reverse” Really Means for You
The first confusing term you are likely to hear when researching reverse mortgages is, of course “reverse.” A reverse mortgage is essentially one that provides you with money instead of one you have to pay. The reverse mortgage balance is due eventually, but not immediately. A traditional mortgage requires you to start paying the balance back almost right away. A reverse mortgage lets you spend the money with no immediate financial obligation to your lender.
What a Home Equity Conversion Mortgage Is
A home equity conversion mortgage is better known as an HECM. A reverse mortgage may be offered by many types of local and national lending companies or banking institutions. An HECM is very similar to a reverse mortgage, but it is specifically only offered by government agencies. Another difference between a reverse mortgage and an HECM is the HECM is government-insured. A standard reverse mortgage is not. Although, if offered by a legitimate lending company, it is governed by certain federal regulations.
What Home Equity and Available Home Equity Are
Home equity for the purposes of reverse mortgage application is the current cash value of your home. However, you cannot borrow the full home equity. Government regulations forbid you from doing so. Therefore, you must determine the available home equity you can borrow. That is determined by a formula created by the federal government and subject to changes.
What a Reverse Mortgage Calculator Is
Since you need to know how much you can borrow, you have to calculate that information. Doing so on your own is impossible. However, there is an online tool called a reverse mortgage calculator you and your lender can use to do that. You can figure out the exact amount available to you using the reverse loans calculator tool. It factors in multiple details, including the current government formula used for reverse mortgage calculation.
The Definition of a Home Equity Line of Credit
Another term you may here when applying for a reverse mortgage is “home equity line of credit.” It is one way to borrow the funds you want. The others are a single lump sum or monthly installments. The total available through the home equity line of credit is determined by the reverse mortgage calculator, just as it would be if you chose a different payment option. Once that total is established, you can use the line of credit to borrow the exact amounts you need until the full balance is borrowed.
What the Reverse Mortgage Loan Period Is
A loan period is how long you have to pay a home loan back. A standard home mortgage has a loan period that is an exact time. For example, your total loan period may be five years. Within that loan period, you must also meet certain repayment requirements. Namely, you must make at least a minimum monthly payment each month to ensure the full balance is paid by the end of the loan period.
A reverse mortgage is quite different. It does not have a set loan period. You also do not have to make partial payments of your balance at set intervals. Instead, you choose how and when you pay the balance back, as long as you do not violate the loan terms, such as by moving out of the home. That means you have a lot more flexibility in terms of repayment of your mortgage debt.