Reverse Mortgage Net Principal Limit

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 centered around the home's equity value and how much the borrower pays in upfront fees.

Key Takeaways

  • The maximum amount of money a borrower can receive from a reverse mortgage is the net principal limit of the reverse mortgage after it closes.
  • An extremely low mortgage net principal limit may prevent borrowers from fully benefiting from the full amount of their home equity.
  • A reverse mortgage net principal limit tends to be substantially lower than the home's appraised market value.
  • Reverse mortgages are only available if you are age 62 years or older.

Understanding Reverse Mortgage Net Principal Limits

Reverse mortgages are available for people aged 62 or older. Also known as home equity conversion mortgages, they allow borrowers to receive cash for the equity in their homes with no monthly payments required. Lenders offer principal loan balances based on the appraised value of the borrower's home, their equity value, and the borrower's age. Depending on the reverse mortgage's terms, money can be disbursed either in installments or as a lump sum.

Most reverse mortgages are backed 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.

A reverse mortgage is 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 fully repay 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 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 you can obtain in the first year.

A regulation first 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

There are numerous costs associated with reverse mortgage loans. Costs include the origination fee, the upfront mortgage insurance premium, appraisal fees, title insurance, and home inspection fees. The FHA has detailed specifications for calculating principal offers, and borrowers are limited to a certain amount over their lives.

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 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.

$970,800

The maximum reverse mortgage loan limit allowed by the FHA in 2022.

Pros and Cons 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 avoid losing money if property values decline.

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

Pros
  • Can help homeowners keep a stake in their homes

  • Help lenders to avoid losing money during a decline in property values

  • Borrowers may be able to afford to stay in their homes

Cons
  • Older homeowners may not get enough equity out of their homes

  • Only people 62 years or older can take advantage of a reverse mortgage

  • Reverse mortgages are complex products

Example of a Reverse Mortgage Net Principal Limit

To qualify for a reverse mortgage, you will need to be age 62 or older and have enough equity in your home to make it profitable and affordable.

For example, let's say the Smiths own a home worth $300,000, and the principal limit factor is 0.50. Their home value is less than the lending limit, so the lending limit has no impact on the calculation. In this case, the principal limit on their reverse mortgage is $150,000. This is the gross amount they can take out, and they will have to pay fees, closing costs, the rest of their existing mortgage, and any liens on the house.

Let's say all of those costs add up to $30,000. The net principal remaining will be $120,000. They will owe $150,000 on their reverse mortgage, and they will walk away with $120,000 in either a line of credit or a lump-sum payment.

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 with the Consumer Financial Protection Bureau or with HUD.

What Is a Principal Limit Factor?


The principal limit factor is the amount of cash the borrower is given based on a percentage of the value of their home. It is affected by both interest rates and the age of the youngest borrower or non-borrowing spouse.

When Must a Reverse Mortgage Be Repaid?

Reverse mortgage loans are usually repaid for two reasons—either the borrower dies or they decide to move out and sell their home. If you do not keep up payments on your home insurance or property taxes, you may end up being forced to repay the mortgage sooner.

How Do You Calculate the Principal Limit on a Reverse Mortgage?

The principal limit for a reverse mortgage is calculated using the age of the youngest borrower or eligible non-borrowing spouse, the maximum claim amount, and the interest rate on the loan.



The Bottom Line

The net principal limit on a reverse mortgage is essentially the limit of funds available to borrowers after accounting for all the fees associated with taking out a reverse mortgage. Borrowers can access up to the net principal limit as part of a lump sum, as ongoing payments, as a line of credit, or a combination of the three depending on the reverse mortgage terms. There are pros and cons to taking out a reverse mortgage, but a critical benefit for some older homeowners may be the ability to use the funds from a reverse mortgage to age in place.

Article Sources

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  1. Internal Revenue Service. "Publication 936, Home Mortgage Interest Deduction."

  2. U.S. Department of Housing and Urban Development. "Home Equity Conversion Mortgages for Seniors."

  3. Consumer Financial Protection Bureau. "When Do I Have to Pay Back a Reverse Mortgage Loan?"

  4. U.S. Department of Housing and Urban Development. "HECM Program Changes, Part 1," Page 11.

  5. Federal Trade Commission. "Reverse Mortgage."

  6. U.S. Department of Housing and Urban Development. "FHA ANNOUNCES NEW SINGLE FAMILY TITLE II FORWARD AND HOME EQUITY CONVERSION MORTGAGE LOAN LIMITS FOR 2022."

  7. Consumer Financial Protection Bureau. "What Happens if my Reverse Mortgage Loan Balance Grows Larger Than the Value of my Home?"

  8. Consumer Financial Protection Bureau. "Reverse Mortgages Key Terms."