HECM has a built-in limit prescribed by federal law for how much a borrower can receive from their reverse mortgage. A homeowner can borrow up to $726,525 in 2019 (up from $679,650 in 2018), or the home’s appraised value, whichever is less The total amount that can be borrowed immediately after the loan closes is called the initial principal limit. This limit increases each month, after the monthly mortgage insurance premium and mortgage interest rate are factored in.
Initial Principal Limit
How much can you borrow with a reverse mortgage? The answer starts with the initial principal limit is the amount of money the borrower can receive from a reverse mortgage loan, and the amount depends on three factors which you should be well familiar with by now:
- The borrower’s age at the time of application
- The appraised value of the property
- The loan’s interest rate
No matter which payment plan the borrower might choose, they are only allowed to receive 60% of the initial principal limit in the first year of the loan. Borrowers need to take these numbers into serious consideration before they sign off on anything, because the initial principal limit will be significantly less than the home’s appraised value, and they will only have access to 60% of that initial limit in the first twelve months.
For example, a borrower with an appraised property value of $300,000 might have an initial principal limit of $200,000 (depending on the three factors noted above). That difference of $100,000 is accounting for the accruing interest that will occur on the loan as time goes on. Let’s assume this homeowner has already paid off their mortgage, and won’t be using any part of their loan to pay off a remaining balance. In the first year, they would only be able to use 60% of the initial principal limit, which is $200,000 (not the appraised value of the property, which is $300,000). That 60% would be $120,000, and that is the full amount of the funds that this homeowner can borrow for the entire first year.
If this borrower were to choose to receive the mortgage loan proceeds in a lump sum with a fixed-interest rate plan, that $120,000 will be all the homeowner can borrow. They would not have access to the remaining $80,000 (40%) of the initial principal limit, unless they were to change the payment plan to an adjustable interest rate. If they stick with the lump sum, however, they might have more home equity leftover in case they would like to move in the future.
If the borrower were to choose the line of credit payment option, they are allowed to withdraw up to 60% ($120,000) in the first year. While the interest rate will be variable, they would be able to access the remaining 40% ($80,000) in later years if they choose to. Due to the growth feature of this payment plan, the amount the homeowner can access will increase each month, which is a great benefit if the plan fits the borrower’s needs.
Regardless, the initial principal limit will be reduced by the lender for any loan fees the borrower is paying with their proceeds, such as the up front mortgage insurance premium and the origination fee. How much can you borrow with a reverse mortgage? The limit can also be decreased by any immediate and necessary home repairs. If the loan requires a life-expectancy set aside (or LESA, covered in the next section), the initial principal limit is reduced by these amounts as well.