Reverse Mortgage Net Principal Limit

What is 'Reverse Mortgage Net Principal Limit'

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 the loan’s closing costs. The net principal limit can depend on a number of factors primarily centered around the home's equity value and how much the borrower has to pay in upfront fees.

BREAKING DOWN 'Reverse Mortgage Net Principal Limit'

Reverse mortgage net principal limit is the net principal a borrower receives in a reverse mortgage loan.

Reverse Mortgages

Reverse mortgages are available for seniors aged 62 or older. They can also be known as home equity conversion mortgages. They allow a borrower to receive cash for the equity in their home with no monthly payments required. Cash can be disbursed in either installments or as a lump sum depending on the mortgages customization. Reverse mortgages are sponsored by the Federal Housing Administration (FHA) and supported by the U.S. Department of Housing and Urban Development. Interested borrowers can find a FHA-approved lender online at www.hud.gov.

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. Borrowers must make full repayment on the loan if they sell the property. Full repayment is also required in the case of a death which leaves the secured property and any recourse assets to the lender.

Net Principal Limit Considerations

Borrowers seeking a reverse mortgage must apply with a 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. 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 life.

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 a number of customized options for a borrower. Borrowers can choose a single-disbursement lump-sum payment with a fixed rate of interest. 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 current net principal limit would be the same.

Borrowers will have numerous costs associated with their reverse mortgage loans. Costs include the origination fee, the up-front mortgage insurance premium, appraisal fees, title insurance and home inspection fees.

For more on reverse mortgages see also How to Choose a Reverse Mortgage Payment Plan, 5 Signs a Reverse Mortgage Is a Good Idea and Picking the Right Reverse Mortgage Lender.