Reverse Mortgage Glossary: Key Terms and Definitions

Reverse mortgages come with their own vocabulary. Understanding these terms will help you navigate conversations with lenders, counselors, and financial advisors with confidence. Bookmark this page as a reference as you explore whether a reverse mortgage is right for you.

Core Reverse Mortgage Terms

HECM (Home Equity Conversion Mortgage)

The most common type of reverse mortgage in the United States. HECMs are insured by the Federal Housing Administration (FHA) and regulated by the Department of Housing and Urban Development (HUD). They come with standardized consumer protections including non-recourse limits, mandatory counseling, and FHA insurance. Nearly all reverse mortgages issued today are HECMs. See our complete introduction for more details.

Home Equity

The difference between your home's current market value and any outstanding mortgage balance. If your home is worth $400,000 and you owe $100,000 on a mortgage, your equity is $300,000. Home equity is the asset that a reverse mortgage converts into accessible funds.

Principal Limit

The maximum amount you can borrow through a reverse mortgage. The principal limit is calculated based on three factors: the age of the youngest borrower, the appraised value of the home (subject to FHA lending limits), and current interest rates. Older borrowers, more valuable homes, and lower interest rates all result in a higher principal limit.

Principal Limit Factor

A percentage used to calculate the principal limit. HUD publishes tables of principal limit factors based on the borrower's age and the expected interest rate. For example, a 72-year-old borrower might have a principal limit factor of 52%, meaning they can access up to 52% of their home's appraised value (subject to the FHA limit).

Non-Recourse Loan

A loan where the borrower's liability is limited to the value of the collateral, in this case, the home. With a non-recourse HECM, neither you nor your heirs will ever owe more than the home's fair market value when the loan is repaid. If the loan balance exceeds the home's value, FHA insurance covers the difference. This is one of the most important protections in the HECM program.

Mortgage Insurance Premium (MIP)

A fee paid to the FHA that funds the insurance protecting both borrowers and lenders. There are two components: an upfront MIP of 2% of the home's appraised value (paid at closing and usually financed into the loan) and an annual MIP of 0.5% of the outstanding loan balance (added to the balance monthly). This insurance is what makes non-recourse protection and guaranteed borrower payments possible.

Payment and Disbursement Terms

Tenure Payments

A disbursement option that provides fixed monthly payments for as long as the borrower lives in the home as their primary residence. Payments continue even if the total amount paid exceeds the original principal limit. Tenure payments offer the most long-term security but result in lower monthly amounts compared to term payments.

Term Payments

A disbursement option that provides fixed monthly payments for a specific number of years chosen by the borrower. Because the payout period is shorter, monthly amounts are higher than tenure payments. Term payments are useful for bridging a temporary income gap, such as the years between retirement and claiming Social Security at age 70.

Line of Credit

A disbursement option that gives the borrower access to a pool of funds they can draw from as needed. The borrower decides when and how much to withdraw. The line of credit is the most popular HECM disbursement option, largely because of its unique growth feature.

Line of Credit Growth Rate

The rate at which the unused portion of a HECM line of credit increases over time. The growth rate equals the current interest rate plus the annual MIP rate (0.5%). This means the longer you leave funds untouched, the more you can access in the future, regardless of what happens to your home's market value. This feature is unique to reverse mortgages and does not exist with traditional home equity lines of credit.

Lump Sum

A disbursement option where the borrower receives all available funds at closing in a single payment. This is the only option available with a fixed interest rate. It is suitable for large, immediate needs such as paying off an existing mortgage, but interest begins accruing on the full amount immediately.

Process and Eligibility Terms

Financial Assessment

A review conducted by the lender to evaluate the borrower's ability to meet ongoing obligations such as property taxes, homeowners insurance, and home maintenance. Introduced in 2015, the financial assessment examines income sources, credit history, and monthly expenses. If concerns arise, the lender may require a Life Expectancy Set-Aside.

Life Expectancy Set-Aside (LESA)

A portion of the reverse mortgage proceeds set aside to pay future property taxes and homeowners insurance on the borrower's behalf. A LESA is required when the financial assessment indicates a borrower may have difficulty meeting these obligations independently. The set-aside reduces the funds available to the borrower but helps prevent defaults that could lead to foreclosure.

HUD-Approved Counselor

An independent counselor certified by the Department of Housing and Urban Development to provide reverse mortgage counseling. Federal law requires all HECM applicants to complete a counseling session before closing. The counselor explains how the loan works, reviews costs and alternatives, and issues a counseling certificate. Read more in our counseling guide.

Counseling Certificate

A document issued by the HUD-approved counselor after the borrower completes the required counseling session. The lender cannot process the HECM application without this certificate. It is valid for 180 days from the date of the session.

Appraisal

A professional assessment of the home's current market value conducted by an FHA-approved appraiser. The appraisal determines the home's value for calculating the principal limit and also identifies any property condition issues that must be addressed before closing.

Loan Structure Terms

Origination Fee

A fee charged by the lender for processing and underwriting the reverse mortgage. For HECMs, origination fees are capped by FHA: $2,500 for homes valued at $125,000 or less, and 2% of the first $200,000 of home value plus 1% of any amount above that, up to a maximum of $6,000. This fee can be financed into the loan.

Closing Costs

Fees paid at the time the loan closes, including the appraisal fee, title search and insurance, recording fees, and other standard charges. Most HECM closing costs can be financed into the loan rather than paid out of pocket.

Servicing Fee

A monthly fee charged by the loan servicer for managing the account, sending statements, and disbursing funds. Servicing fees for HECMs are regulated and relatively modest, typically $25 to $35 per month. Some lenders do not charge a separate servicing fee.

Interest Rate (Fixed vs. Adjustable)

The rate at which interest accrues on the outstanding loan balance. Fixed rates are available only with the lump sum option and remain constant for the life of the loan. Adjustable rates are available with all other options and change periodically based on market indices, subject to annual and lifetime caps.

Expected Interest Rate

The rate used to calculate the principal limit. For fixed-rate HECMs, this is the actual loan rate. For adjustable-rate HECMs, it is based on the 10-year LIBOR swap rate (or CMT equivalent) plus the lender's margin. The expected rate does not determine your actual loan interest charges; it only affects how much you can borrow.

Repayment and Estate Terms

Due and Payable

The status of a reverse mortgage when repayment is triggered. A HECM becomes due and payable when the last borrower passes away, sells the home, moves out for more than 12 months, or fails to meet loan obligations. Once due and payable, the full loan balance must be repaid.

Non-Borrowing Spouse

A spouse who lives in the home but is not listed as a borrower on the reverse mortgage, usually because they are under 62. Since 2015, HUD rules allow eligible non-borrowing spouses to remain in the home after the borrowing spouse passes away, provided certain conditions are met.

HECM for Purchase

A specialized HECM product that allows borrowers 62 and older to purchase a new primary residence using reverse mortgage financing. The buyer makes a down payment (typically 40-60% of the purchase price) and finances the remainder with a reverse mortgage, resulting in no monthly mortgage payments on the new home.

Proprietary Reverse Mortgage

A private reverse mortgage product not insured by FHA. Proprietary reverse mortgages are designed for homeowners with high-value properties that exceed FHA lending limits. They may offer higher loan amounts but lack the standardized consumer protections of the HECM program, such as mandatory counseling and the FHA non-recourse guarantee.

The Bottom Line

This glossary covers the most important terms you will encounter when researching reverse mortgages. Familiarity with this vocabulary will help you have more productive conversations with lenders and counselors and make more confident decisions. For a comprehensive overview of how all these pieces fit together, start with our guide on how reverse mortgages work.