Reverse Mortgage Glossary – Part 1

The terms surrounding a reverse mortgage can be confusing. Below is the first post in our series of a reverse mortgage glossary. Early posts will focus on terms for beginners, but later posts will become more advanced.  The glossary will then be posted on our website.

Mortgage Terminology Part 1:

Adjustable-Rate Mortgage (ARM)- A loan with an interest rate that changes with market conditions on pre-determined dates.

Appraisal- A report that states an opinion on the value of a property based on its characteristics and the selling prices of similar properties or comparable properties in the area.

Appreciation- An increase in the value of a house due to changes in market conditions or other causes.

Closing – The final step after a lender approves an application. The occasion when a borrower signs loan documents, including the mortgage or deed of trust, and when closing costs are paid. Also referred to as “settlement.”

CMT – Constant Maturity Treasury – Also often known as a “treasury bill” or “T-Bill,” it helps set the interest rate for some adjustable rate mortgages.

Deed of Trust- The legal document encumbering title to a property.

Equity- The portion of the value of the property that exceeds the current amount of your home loan. If, for example, the property is worth $100,000 and the loan is for $75,000, then there is $25,000 (25% equity) remaining in your home.

Fixed-Rate Mortgage – A loan with a pre-determined interest rate that is agreed upon for the term of the loan.

HECM (Home Equity Conversion Mortgage) – The most common type of FHA insured mortgage. HECMs encompass 100% of reverse mortgage transactions in 2009, and 99% in 2008.

HELOC (Home Equity Conversion Loan) – a loan sometimes mistakenly considered similar to a reverse mortgage.

 

15 year Fixed Rate Mortgages Become More Popular

A NYTimes graph displaying traditional forward mortgage rates for the NY region

A NYTimes graph displaying traditional forward mortgage rates for the NY region

Although reverse mortgages require no mortgage payments, many homeowners still have traditional forward mortgages.  It is in the context of this traditional market that the following information applies: 

The New York Times reported this weekend that 15 year fixed rate mortgages have surged in popularity recently.  The number of 15 year fixed rate mortgages increased 56.6% from January to February.   While these mortgages may seem attractive, sometimes saving borrowers tens of thousands of dollars in interest payments, lenders counsel that with higher payments, those with 15 year mortgages are more likely to have trouble making payments should they lose their job or encounter another financial emergency.  One lender in the article proposed getting a 30 year mortgage and making the payments to pay it off in 15 years, but that way if there were an emergency, the borrower would have a cushion. 

I do think that unorthodox thinking appears to be one of the best ways to get through the recession and through nearly any crisis.  It is unsurprising that borrowers are looking for low rates (rates on the 15 year fixed rate mortgage are the lowest they’ve been since June 2003).  In addition, being able to pay off a mortgage in 15 years is becoming a more and more tempting opportunity for borrowers who don’t want to have to make mortgage payments in retirement–another factor that has made reverse mortgages tempting.