Reverse Mortgage Initial Principal Limit

DEFINITION of 'Reverse Mortgage Initial Principal Limit'

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. Regardless of the 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.

BREAKING DOWN 'Reverse Mortgage Initial Principal Limit'

The initial principal limit will 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.

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.

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.