What Is a Reverse Mortgage Initial Principal Limit?

Reverse mortgage initial principal limit is the amount of money a reverse mortgage borrower can receive from the loan. The initial principal limit depends on the borrower’s age at the time of application, the loan’s interest rate and the home’s appraised value.

Key Takeaways

  • A reverse mortgage initial principal limit defines the maximum amount that a borrower using a reverse mortgage can receive from the loan.
  • This amount will tend to be a substantially lower amount than the home's appraised market value.
  • By regulation, the initial amount received from a reverse mortgage in the first year cannot exceed 60% of the loan's total amount.

Understanding Reverse Mortgage Initial Principal Limits

If you own your own home and are at least 62 years of age, a reverse mortgage provides an opportunity to convert your home equity into cash. In the most basic terms, the reverse mortgage allows you to take out a loan against the equity in your home, but you don't have to repay the loan during your lifetime as long as you are living in the home and have not sold it. If you want to increase the amount of money available to fund your retirement, but don't like the idea of making payments on a loan, a reverse mortgage is an option worth considering. 

The reverse mortgage initial principal is the amount of money a reverse mortgage borrower can receive from the loan. This limit will typically be significantly less than the home’s appraised value. A borrower with a $300,000 house might have an initial principal limit of $200,000. The $100,000 difference accounts for the interest that will accrue on the reverse mortgage over the years. We’ll assume this homeowner owns his home free and clear, so he’s not using part of the reverse mortgage proceeds to pay off a first mortgage. He would be able to access a maximum of 60% of the $200,000 initial principal limit, or $120,000, in the first year of the reverse mortgage.

Regardless of which reverse mortgage payment plan the borrower selects, a regulation implemented in 2013 limits to 60% the amount of the initial principal limit borrowers can receive as reverse mortgage proceeds in the first year they have the loan.

Other Considerations

If he chooses the lump sum payment plan, which has a fixed interest rate but only allows a single up-front withdrawal, he will not be able to access the remaining $80,000 of his initial principal limit in later years. An exception is if he changed his reverse mortgage payment plan, which would mean switching to a variable interest rate. On the plus side of the lump sum option, he will have more home equity since he will not use it all up with the reverse mortgage. Instead of a lump sum, the borrower can also received fixed and equal monthly payments via a tenure payment plan.

Alternatively, if he chooses the line of credit payment plan, he can withdraw up to $120,000 in the first year. The interest rate will be variable, but he will be able to access the remaining $80,000 of his initial principal limit in later years. In fact, the amount he can access will increase a little bit each month because of this payment plan’s growth feature.