Reverse Mortgage Initial Principal Limit

What Is a Reverse Mortgage Initial Principal Limit?

A reverse mortgage initial principal limit is the amount of money that 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.

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, a 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.

A reverse mortgage initial principal is the amount of money that a reverse mortgage borrower can receive from the loan. This limit typically will be significantly less than the home’s appraised value.

For example, 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 their home free and clear, so they’re not using part of the reverse mortgage proceeds to pay off a first mortgage. The homeowner 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 a borrower selects, a 2013 regulation limits to 60% the amount of the initial principal that borrowers can receive as reverse mortgage proceeds in the first year of the loan.

Special Considerations

If the homeowner from the example above chooses a lump-sum payment plan, which has a fixed interest rate but only allows a single up-front withdrawal, they will not be able to access the remaining $80,000 of their initial principal limit in later years. An exception is if they changed their reverse mortgage payment plan, which would mean switching to a variable interest rate.

On the plus side of the lump-sum option, the homeowner will have more home equity since they will not use it all up with the reverse mortgage. Instead of a lump sum, the borrower can also receive fixed and equal monthly payments via a tenure payment plan.

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

The Bottom Line

A reverse mortgage initial principal limit is the total amount that a borrower can access on their reverse mortgage. It can be paid as part of a lump sum, as ongoing payments, as a line of credit, or as a combination of the three depending on the terms of the reverse mortgage.

The limit is lower than the amount of equity that a borrower has in their home, and borrowers cannot access all of their initial principal at once due to regulations set by the U.S. Department of Housing and Urban Development (HUD).