Home Equity Glossary

The Home and Its Equity: Foundation Terms

Before any loan term makes sense, it helps to know the words for the house itself and what is owned free and clear.

Home equity. Equity is the part of the home the owner truly owns. The Consumer Financial Protection Bureau describes it as "the amount your property is worth today minus the amount you owe on your mortgage and any home equity loan or line of credit," in its reverse mortgage guide.

Appraised value. This is the dollar value a licensed appraiser assigns to the property. Lenders use it to help decide how much may be borrowed.

Principal residence. This is the home where a person lives most of the year. For a reverse mortgage, it is a continuing condition, not just a box checked at the start.

Lien. A lien is a legal claim a lender holds against a property until a loan is repaid. A reverse mortgage creates one.

Title. Title means legal ownership. With a reverse mortgage, the CFPB explains, "the title to your home remains in your name," as with a traditional mortgage.

Mortgage or deed of trust. This is the document that secures the loan against the property. It is what gives the lender its lien.

Is a Reverse Mortgage a Loan? The Basic Terms

What families usually want to know first is simple: is this a loan, and who pays it back? The answer is yes, it is a loan, and it is repaid later, usually from the home.

Reverse mortgage. A loan that lets an older homeowner borrow against home equity with no required monthly mortgage payment. Interest and fees are added to the balance each month, so the amount owed grows and equity shrinks over time. The CFPB says plainly that it "is not free money." The borrower must keep living in the home as a principal residence, pay property taxes and homeowners insurance, and keep the house in good condition. The loan generally comes due when the last borrower or eligible non-borrowing spouse dies, sells the home or no longer lives there as a principal residence. Federal rules describe this kind of loan in 12 C.F.R. § 1026.33 as one due, other than in default, only after the consumer dies, the dwelling is transferred, or the consumer stops living there as a principal dwelling.

HECM (Home Equity Conversion Mortgage). HUD's HECM program page calls it "the only reverse mortgage insured by the U.S. Federal Government," available only through a Federal Housing Administration (FHA)-approved lender. The program is authorized by 12 U.S.C. § 1715z-20. The CFPB calls it the most common type of reverse mortgage.

Proprietary reverse mortgage. A private reverse mortgage product a lender offers on its own, outside the FHA insurance program. These are often aimed at higher-value homes, and their terms and protections differ from a HECM's.

Single-purpose reverse mortgage. A loan some government agencies or nonprofits offer for one approved use, such as home repairs or property taxes.

Eligibility and Qualification Terms

These are the words a lender and a counselor use when they talk about who may be eligible. Being eligible is a starting point; a lender makes the decision.

Eligible borrower age. Under 24 C.F.R. § 206.33, "The youngest borrower shall be 62 years of age or older at the time of loan closing."

Principal residence requirement. Under 24 C.F.R. § 206.39, the property "must be the principal residence of each borrower, and if applicable, Eligible Non-Borrowing Spouse, at closing."

Eligible non-borrowing spouse. The CFPB describes this as a spouse who is not a co-borrower but qualifies under HUD's rules to stay in the home after the borrower dies. HUD's lender guide notes this spouse must be 18 or older. Because these protections turn on HUD's current rules, a HUD-approved counselor can confirm how they apply to a particular couple.

Financial assessment. This is the lender's review of income, credit history and the ability to keep up ongoing costs. The CFPB lists other HECM requirements, including owning the home outright or having a low enough balance to pay off at closing, and not owing federal debt such as federal income taxes or federal student loans, though loan money may be used to pay either.

Life expectancy set-aside (LESA). The CFPB says a borrower must have enough of their own money, or agree to set aside part of the reverse mortgage funds at closing, to pay property charges such as taxes and insurance, as well as maintenance and repairs. A LESA is that set-aside, and it may be full or partial.

Eligible property types. The statute requires a dwelling "designed principally for a 1- to 4-family residence in which the mortgagor occupies 1 of the units." The home must also meet FHA property standards. Condominium units and manufactured homes have their own FHA requirements, including approval of a condominium project, which a lender confirms.

How the Loan Amount Is Determined: Principal Limit and Related Terms

The question behind these terms is how much might be available, and why the number differs from one household to the next. The answer depends on facts a lender reviews, never a promise.

Principal limit. The total a borrower may be able to draw from a HECM. HUD says the amount "varies by borrower" and depends on factors including the age of the youngest borrower or eligible non-borrowing spouse. When there is more than one borrower and no eligible non-borrowing spouse, the youngest borrower's age is used.

Maximum claim amount. HUD describes this factor as the "lesser of appraised value or the HECM FHA mortgage limit or the sales price." HUD publishes the current limit.

Principal limit factor. A percentage HUD publishes that is applied to the maximum claim amount. It reflects age and the expected interest rate.

Expected interest rate. The rate used to calculate the principal limit at the start. It is separate from the rate actually charged on the balance.

Payment options. Under 12 U.S.C. § 1715z-20(d)(9), the borrower selects how money is paid: a line of credit; monthly payments over a term the borrower chooses; term payments combined with a line of credit; monthly payments over the borrower's tenure; tenure payments combined with a line of credit; or "any other basis that the Secretary considers appropriate," such as a single lump sum. The statute lets the borrower change methods later, except that HUD may limit changes on a fixed-rate loan.

Tenure payment. A monthly payment that continues while the borrower lives in the home as a principal residence and meets the loan's obligations.

Term payment. A monthly payment for a set number of months the borrower picks.

Line of credit growth. Under a HECM's terms, the unused part of a line of credit may grow over time. A lender explains how, and no amount is assured.

An equity access calculator offers only an illustration; a HUD-approved counselor is the next step for real numbers.

Costs, Fees, and Insurance: What Gets Added to the Balance

Families often ask what a reverse mortgage costs when no monthly payment is due. The costs are real; they are usually added to the loan balance, so the amount owed grows over time.

Origination fee. The lender's charge for making the loan. Federal rules limit it, the statute provides that it "may be fully financed with the mortgage," and the lender discloses it.

Upfront mortgage insurance premium (MIP). A one-time FHA insurance charge at closing, usually added to the balance. HUD sets the current rate.

Annual MIP. An ongoing insurance charge added to the balance over the life of the loan. HUD sets this rate as well.

Closing costs. Third-party charges such as the appraisal, title search, title insurance and recording fees, much like those on a traditional mortgage.

Servicing fee. A monthly fee some lenders charge to manage the loan.

Servicing fee set-aside. An amount held back from the principal limit at closing to cover projected servicing fees.

Total Annual Loan Cost (TALC). A single yearly rate showing the projected average cost of the loan. The statute requires a statement of the projected total cost, "expressed as a single average annual interest rate," before closing. The Federal Trade Commission's reverse mortgage advice suggests asking a counselor or lender to explain TALC rates.

Federal law also bars making a borrower buy insurance, an annuity or a similar product to qualify, except customary coverage such as title, hazard or flood insurance.

Why the Balance Grows, and Where It Stops

This is the part that worries families most: the balance gets bigger, not smaller. Knowing why, and where it stops, can take some of the fear out of it.

Accrued interest. Interest added to the balance each month instead of paid. Because nothing is paid down, interest builds on a growing balance. The FTC notes this "can use up much – or even all ─ of your equity."

Fixed rate. A rate that stays the same for the life of the loan. Payment options can be more limited with a fixed rate, which the lender explains.

Adjustable rate. A rate that changes over time based on an index.

Index and margin. The index is a published benchmark; HUD's page mentions the CME Term SOFR index. The margin is a set amount the lender adds. Together they make the rate. HUD notes borrowers receive notices from the lender about any change in the rate.

Non-recourse. A loan where the debt is limited to the home. In plain words, the CFPB says, "neither you nor your heirs will have to pay back more than your home is worth." Under 12 U.S.C. § 1715z-20(d)(7), the homeowner is not liable for any gap between the balance and what the lender recovers from the net sale proceeds or FHA insurance benefits.

When the Loan Comes Due and What Your Family Can Do

A family facing the end of a loan wants to know two things: what starts the clock, and what choices remain.

Due and payable event. Under 24 C.F.R. § 206.27(c), the balance becomes due if a borrower dies and the home is not the principal residence of a surviving borrower, subject to a Deferral Period for an eligible non-borrowing spouse, or if a borrower conveys all title and no other borrower keeps title. With HUD's approval, it also becomes due if the home stops being a borrower's principal residence for reasons other than death; if a borrower is away more than 12 consecutive months because of physical or mental illness; if property charges are not paid; or if another obligation under the mortgage is not met. In each of the last three living-situation cases, the rule applies only when no other borrower lives there as a principal residence.

Repayment choices for heirs. Heirs may repay the balance and keep the home, sell it and repay the loan from the sale, keeping anything left, or give the home to the lender through a deed in lieu of foreclosure. The CFPB notes repayment usually comes from selling the home.

Foreclosure. The legal process a lender may use to sell a home when a loan is not repaid. The CFPB warns that foreclosure is possible if a borrower runs out of money for taxes, insurance or other housing costs.

HUD assignment. The statute allows HUD to accept assignment of an insured mortgage even when the borrower is not in default.

Right of rescission. The CFPB says that with most reverse mortgages, a borrower may cancel within three business days after closing, for any reason, without penalty.

The Protections and Pauses the Law Builds In

For a parent who feels rushed by a salesperson, these terms describe the pauses the law builds in.

HUD-approved counseling. Under 12 U.S.C. § 1715z-20(d)(2)(B), a HECM borrower must receive counseling from an independent third party not tied to the loan, its funding or the sale of other financial products. The counselor must discuss topics including other options, the financial implications, and that the loan may affect taxes, benefit eligibility, the estate and heirs. HUD's HECM program page offers a counselor roster and the phone line (800) 569-4287.

Counseling certificate. The document showing counseling was completed. HUD's lender guide says lenders complete fields to record the counseling, including the HECM Counseling Certificate Number and Counsel Date.

Loan Estimate. An early disclosure of projected costs; federal rules govern its timing and content. The statute also requires a written list of counseling sources at application and, at least 10 days before closing, a statement that liability is limited and explaining rights and obligations.

Annual statement. By January 31 each year, the lender must summarize amounts paid, interest added and the balance.

Total Annual Loan Cost disclosure. Defined above with the costs.

Cooling-off period. Some states require a waiting period between counseling and signing.

Agency resources. The CFPB's overview of reverse mortgages warns of contractor scams and false veteran offers, noting that the Department of Veterans Affairs offers no reverse mortgage loans.

Other Home Equity Options: Terms Worth Knowing

A homeowner weighing choices is usually comparing more than one path. The CFPB's eligibility guide names alternatives including waiting, a home equity loan or line of credit, refinancing, downsizing and lowering expenses. A broader look at home equity in retirement sets these side by side.

Home equity loan. A lump sum secured by the home, repaid in monthly installments over a set term. The CFPB notes these may be cheaper but carry their own risks and depend on income and credit.

Home equity line of credit (HELOC). A credit line secured by the home; the borrower draws as needed and makes monthly payments. The differences appear in HELOC vs home equity loan and reverse mortgage vs home equity loan.

Cash-out refinance. A new, larger mortgage replaces the old one, and the borrower receives the difference in cash, with monthly payments on the new loan.

Shared equity or shared appreciation. An investor provides money now in exchange for a share of the home's future value.

Property tax deferral. Some state and local programs let eligible older homeowners put off property taxes; availability and terms vary.

Downsizing or selling. Selling and moving somewhere less costly frees equity outright. The tradeoffs are laid out in reverse mortgage vs selling.