"What are the maximum reverse mortgage limits?" That's perhaps the most common question posed by those 62 years or above who wish to release some of the equity they've built up in their residences. For those applying for an FHA-backed home equity conversion mortgage (HECM, pronounced "heck 'em"), calculating the maximum loan amount isn't too difficult, because the rules are clearly laid out. However, there are two other types of reverse mortgage loans:
- Jumbo or "proprietary" reverse mortgages. These are offered by the private sector, and each company sets its own rules. These are generally more flexible than HECMs, and may be available to those who don't qualify under the FHA's program or who wish to borrow more than it allows. However, they're less regulated than HECMs, and can be more expensive than the government-backed alternative. This makes careful comparison shopping essential.
- Single purpose reverse mortgages. As the name implies, these can be used for only one purpose. and that's usually home repairs, payment of property taxes or making energy-efficiency improvements. They tend to be offered by local government agencies or nonprofit organizations and are usually available to low-income borrowers only. Reverse mortgage interest rates are usually low (or even zero). Again, eligibility criteria and borrowing limits vary from lender to lender.
Because maximum reverse mortgage limits are often unique to each lender of jumbo/proprietary and single-purpose loans, it's not possible to provide helpful guidelines -- the information given below applies only to HECMs.
Maximum Borrowing Limits for HECMs
No one gets to borrow against 100 percent of their home equity. That's because unlike traditional "forward" mortgages, reverse mortgage balances increase over time. If you were to borrow against all of your equity, your loan balance would soon outstrip your home value. So the amount you can borrow is determined by a "principal limit factor," or PLF. Your property value (or $625,000, which ever is lower) is multiplied by the PLF to come up with your maximum loan. For example, if your home is worth $500,000 and your PLF is .50, you can borrow $250,000. Find out how much you could potentially borrow using our reverse mortgage lump sum calculator.
These four factors effect your HECM payout:
- The age of the youngest borrower. Even if a younger spouse is not a borrower, his or her age is still considered. That's because recent regulations state that a non-borrowing spouse cannot be evicted from a home with HECM financing if the borrowing spouse dies or moves out. At a five percent interest rate, a 62-year-old can borrow against 52.4 percent of her home equity, while a 75-year-old can borrow against 61.4 percent of her property value.
- Current mortgage rates. The lower the rate, the higher the PLF.
- The initial mortgage insurance premium (MIP) payable. This is significantly higher (2.5 percent of the property's appraised value) for those who wish to withdraw 60 percent or more of the total made available under the reverse mortgage during the first year of the loan. Those who need less than 60 percent in those first 12 months pay just 0.5 percent. As the MIP is usually deducted from the loan amount, this has an effect on the total received.
- Your ability to manage debts. HECM lenders are required to conduct a "financial assessment" to make sure you can manage your housing-related expenses, like property taxes and homeowners insurance. If the lender believes you can't do this, it withholds some of your HECM proceeds and pays these obligations for you. This is to prevent HECM foreclosures.
As a rule, the amount available grows the older the borrower, the higher the value of the home, the lower the mortgage rate and the smaller the amount to be withdrawn during the first year of the loan. Readers who'd like to discover how much they as individuals can borrow can receive free, no-obligation reverse mortgage offers.
Borrowing Options Can Affect the Total Amount Received
The amount a borrower receives can also be affected by how he or she chooses to access the funds released by the reverse mortgage. There are four major options here:
- A single lump sum: A lump sum payout at closing is the only way you can get a fixed interest rate, but this could require you to pay the higher MIP rate.
- Tenure: This is a bit like an annuity, in that it pays a fixed monthly sum for as long as you reside in the mortgaged home.
- Term: You receive a fixed sum each month, but only for a previously agreed period of time, perhaps five or ten years. Monthly payments under this plan are usually higher than they are under the tenure option.
- Line of credit: You withdraw funds when you want, up to the borrowing limit. Your line of credit grows over time, so you may be able to borrow more over time with this option.
It should be noted that it's possible to combine a term or tenure with a line of credit (these are called "modified" terms and tenures) for maximum flexibility.