What Is a Reverse Mortgage Net Principal Limit?

A reverse mortgage net principal limit is the amount of money a reverse mortgage borrower can receive from a loan once it closes, after accounting for its closing costs. The net principal limit can depend on several factors primarily centered around the home's equity value and how much the borrower has to pay in upfront fees.

Key Takeaways

  • A reverse mortgage net principal limit is the maximum amount of money a borrower can receive from a reverse mortgage.
  • This amount is calculated net of fees, closing costs, and other charges that may accompany the reverse mortgage process.
  • A reverse mortgage net principal limit will tend to be substantially lower than the home's appraised market value.

Understanding Reverse Mortgage Net Principal Limits

A reverse mortgage net principal limit is the net principal a borrower receives in a reverse mortgage loan, after deducting any costs and fees. The net principal limit will often be higher than the reverse mortgage initial principal limit, which is the maximum amount one can obtain in the first year.

Reverse mortgages are available for seniors aged 62 or older. They are also known as home equity conversion mortgages. They allow borrowers to receive cash for the equity in their homes with no monthly payments required. Money can be disbursed either in installments or as a lump sum, depending on the reverse mortgage's terms. Reverse mortgages are sponsored by the Federal Housing Administration (FHA) and supported by the U.S. Department of Housing and Urban Development (HUD). Interested borrowers can find an FHA-approved lender online at HUD's website.

Reverse mortgages are an alternative type of second mortgage with a borrower's property used as the secured collateral. Interest accrues over the life of the loan at a specified interest rate. Most importantly, borrowers must make full repayment on the loan if they sell the property. Complete repayment is also required in the case of a death that leaves the secured property and any recourse assets to the lender.

A regulation implemented in 2013 placed a limit of 60% on the amount of the initial principal limit borrowers can receive as reverse mortgage proceeds in the first year they have the loan.

Special Considerations

Borrowers seeking reverse mortgages must apply with an FHA-sponsored lender. Lenders will offer principal loan balances based on the appraised value of the borrower's home, their equity value, and the borrower's age.

Furthermore, borrowers will have numerous costs associated with their reverse mortgage loans. Costs include the origination fee, the upfront mortgage insurance premium, appraisal fees, title insurance, and home inspection fees. Borrowers must be at least 62 years old, and principal balances cannot exceed FHA-sponsored limits. The FHA has detailed specifications for calculating principal offers, and borrowers are limited to a certain amount over their lives.

Most borrowers choose to pay a reverse mortgage’s closing costs with their principal balance. A borrower’s remaining balance after closing costs is considered to be their net principal balance.

Reverse mortgages offer several customized options for a borrower. Perhaps the most attractive is that borrowers can choose a single-disbursement lump-sum payment with a fixed interest rate. Several options are also available with variable rates, including monthly disbursements and lines of credit. With all of these options, the borrower’s net principal limit is the total balance they have available after fees.

The net principal limit can also be compared with the current net principal limit. The current net principal limit is the revolving balance available on the borrower's account. At the onset of the loan, the net principal limit and the current net principal limit would be the same.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

Advantages and Disadvantages of Reverse Mortgage Net Principal Limits

A significant benefit of reverse mortgage net principal limits is that they ensure homeowners retain meaningful stakes in their homes. Without a stake, the property holder might allow many nonessential parts of the house to fall into disrepair, preferring to save the money for heirs. Reverse mortgage net principal limits also help lenders to avoid losing money if property values decline.

On the other hand, overly low reverse mortgage net principal limits can prevent senior citizens from fully tapping into their home equity. Suppose, as is often the case, they also cannot earn very much income anymore. Then, seniors may have to sell their houses or forgo nonessential repairs.