Reverse Mortgage Glossary
Lump sum is an option for receiving proceeds from both the variable-rate HECM and fixed-rate HECM reverse mortgage products. Proceeds can only be received as a lump sum from the fixed-rate HECM, but the variable-rate HECM offers the option of lump sum in combination with term or tenure payments and line of credit.
The 60% Utilization Rule
FHA made an important change a few years ago that limits how much of a lump sum you can access in the first 12 months of the reverse mortgage. The following is a rundown of how this rule impacts both HECM products:
- Fixed-rate HECM: If your mandatory obligations are less than 60% of the principal limit (the total pool of cash you qualify for), you’ll be required to take a lump sum at closing up to 60% of the principal limit. No other cash will be available. If your mandatory obligations are greater than 60%, you’ll be allowed to take up to an additional 10% of the principal limit at closing if it’s available. Again, no other cash will be available.
- Variable-rate HECM: If your mandatory obligations are less than 60% of the principal limit, you’ll be allowed to take a lump sum up to 60% of the principal limit at closing. The remaining 40% of the principal limit will come available at the one-year anniversary of the loan. If your mandatory obligations are greater than 60%, you’ll be allowed to take up to an additional 10% of the principal limit at closing (if available). The remainder of the principal limit, if any, will come available at the one-year mark.
The idea behind this rule is to encourage longer-term financial sustainability for reverse mortgage borrowers by preventing them from burning through the proceeds too quickly and having nothing left.
Note that a higher IMIP rate will apply if your mandatory obligations are greater than 60% at the time of loan origination.
Only take money as a lump sum if you really need it for immediate use, such as home improvements or paying off other debts. It doesn’t make sense to pull out the money, accrue interest on a larger loan balance, and just leave it sitting in a checking or savings account earning little to no interest. A better option might be to go with a line of credit, which is only available on the variable-rate HECM. You can pull out money whenever you need it and interest accrues only on what you’ve used. On top of that, your available credit will grow and compound larger based on a growth rate, which gives you access to even more money over time.
How Much Can You Get From a Reverse Mortgage?
Check out our no-strings-attached HECM reverse mortgage calculator to find out how much you may be able to get from a reverse mortgage. It's simple to use and fast!