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HECM Reverse Mortgages - How Much Money Can You Get?
By Peter Boston
With reverse mortgages, everyday terms related to loans and loan amounts can mean very different things than what you might expect. It is important then to precisely define these terms as they are used for reverse mortgages.
Principal limit or maximum principal limit is the total aggregate amount of money that will ever be available over the life of the reverse mortgage. Whether the money is paid to the borrower monthly, in a lump sum, or from time to time, when you count every dollar paid from the loan it cannot add up to more than the principal limit.
The loan balance is the actual amount of money that is charged to the loan by cash advances to the borrower, plus accrued interest on the disbursed cash, plus fees. You can see right away that part of the principal limit is going to be eaten up in accrued interest and fees. The actual amount of cash that the borrower can get over the life of the reverse mortgage will always be something less than the principal limit.
The loan balance is the flour that gets scooped out of the can. There’s some for you, and always some for HUD, and some for the lender. You eventually have to pay for all the flour that gets scooped out of the can regardless of where it goes. The major criticism of HECM reverse mortgages is that more than 4% of the flour in your can gets scooped by HUD, the lender, and an assortment of service providers at the closing.
The maximum principal limit that you can get with a HECM reverse mortgage is based on a HUD formula that considers three primary factors.
The age of the youngest borrower
The minimum age for any borrower is 62. This is a HUD eligibility requirement so the loan application cannot even go forward unless every person shown as an owner on the property deed is age 62 or older. Lenders will usually bump up the age of the youngest borrower by 1 year if he or she is less than 6 months from their next birthday at the time of the application.
Age is a primary consideration because the longer the life expectancy of the youngest borrower, the more servicing fees, mortgage insurance premiums, and interest will be charged to the loan balance over the life of the loan. Because these costs and fees are expected to take a bigger bite out of the principal limit there is going to less cash available to the borrower.
The maximum claim amount
The maximum claim amount is a cap on the principal limit. This cap is set at the lesser of your home’s appraised value or the FHA max loan amount for houses in your geographic area. Think of this as the zip code cap.
Generally urban areas get higher caps than rural areas, and some urban areas get higher caps than others. These numbers change regularly and the lender will have the latest information. You can check for yourself at https://entp.hud.gov/idapp/html/hicostlook.cfm
The expected average mortgage interest rate
This is a fancy term for the discount rate the lender uses to present value your loan. A dollar to be paid in 10 years is always worth less than a dollar paid today. The expected average mortgage interest rate calculation is based on the price of 10 year Treasury securities plus something called the sum of the margin. The lower this rate the higher the principal limit and vica versa. The expected average mortgage interest rate is not the interest rate you will pay on your loan balance. That rate is calculated in a different way. The expected average mortgage interest rate is used only to determine the principal limit.
These are the major factors used to determine how much money you can get from an HECM reverse mortgage. Any lender can do an accurate calculation based on the information you give them about your personal situation. The basic rule is the older the youngest borrower, the lower the prevailing interest rates, and the higher the cost of housing in your area, the higher the principal limit on a HECM reverse mortgage.
For a very rough estimate: subtract 6 from the age of the youngest borrower, use that number as a percentage of your home's market value, subtract from that amount your current mortgage and any liens. E.g. 70 year old borrower, $200,000 market value, $25,000 existing mortgage. 70 - 6 = 64. $200,000 * .64 = $128,000 estimated principal limit. Subtract $25,000 from $128,000 to get $103,000 estimated money availability. If your house is worth a lot more than $200,000 you will probably be limited by the zip code cap.
About the Author
Peter Boston is an attorney, writer, and the editor of the profacere.com website, a tips and resource site for reverse mortgages, credit cards, improved credit scores, and consumer credit information, updated daily on the Profacere Blog.