Reverse Mortgage Net Principal Limit
What is 'Reverse Mortgage Net Principal Limit'
The amount of money a reverse mortgage borrower can receive from the loan once it closes, after accounting for the loan’s closing costs. The net principal limit depends on (1) how much the borrower has to pay in origination fees, up-front mortgage insurance and other closing costs, and (2) the initial principal limit, which depends on the borrower’s age at the time of application, the loan’s interest rate and the home’s appraised value.
BREAKING DOWN 'Reverse Mortgage Net Principal Limit'
The home’s appraised value will be significantly higher than either the initial principal limit or the net principal limit. Suppose the borrower’s home is worth $250,000. After factoring in the interest that will accrue on the reverse mortgage over the years – and how long the borrower is expected to live – the lender sets the initial principal limit at $175,000.
To get the net principal limit, the following types of items are subtracted from the initial principal limit: the loan’s closing costs, including the origination fee (2% of the initial $200,000 of the home’s value and 1% of the remaining value, or $4,500 in this case); the up-front mortgage insurance premium (0.5% of the home’s value if borrowing less than 60% of the initial principal limit; 2.5% if borrowing more); third-party costs such as appraisal, title insurance and home inspection fees; and, in some cases, set-asides for home repairs that are a requirement of getting the loan.
Closely related to the net principal limit is the current net principal limit, which shows how much the homeowner can still borrow after accounting for all expenses incurred and amounts borrowed so far. For example, a borrower with an initial principal limit of $175,000 and a net principal limit of $165,000 – who has a line-of-credit payment plan and has withdrawn $30,000 so far over the five years she has had the loan – would have a current net principal limit of $135,000 less five years’ worth of monthly mortgage-insurance premiums (MIPs) and interest accrued on the $30,000 and the MIPs, plus the amount by which his credit line had increased through its growth feature. For more, see How to Choose a Reverse Mortgage Payment Plan.