How much can I get on a reverse mortgage? Well, that depends. And believe me, I’m not attempting to be trite by saying that.
The amount you can get from a reverse mortgage varies depending on a few different factors. Every borrower qualifies for a different amount because their circumstances and qualifications are different.
Before I explain the factors that determine how much you can get, let me first cover a few basics so what I go over later will make more sense.
Reverse Mortgage Basics
The particular reverse mortgage I’m referring to here is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry professionals).
The FHA-insured HECM is by far the most common reverse mortgage in the United States today. If you know somebody who got a reverse mortgage, it likely was a HECM.
The HECM is a home loan designed to give seniors 62 and over the ability to convert a portion of their home’s value into cash without giving up ownership of the home or taking on a mortgage payment. As long as at least one borrower is living in the home and paying the required property charges, no mortgage payments are required.
Reverse mortgage borrowers always retain title ownership of the home and are free to leave it to their heirs. If the heirs wish to keep the home, they can pay off or refinance the reverse mortgage balance. If the heirs don’t want the home, they can either sell it themselves or let the lender sell it. Once the reverse mortgage is paid off, they heirs will receive any leftover equity.
If the home isn’t worth enough to settle the entire reverse mortgage balance, FHA will cover the shortage. The HECM is a non-recourse loan, which means the most that will ever have to be repaid is the value of the home.
Proceeds from a HECM are commonly used to get rid of existing mortgage or other debt payments, finance home improvements, or supplement existing retirement income or assets.
The HECM is very versatile and can be tailored to your financial needs and goals. Proceeds can be received in the form of a lump sum, line of credit, or term/tenure payments, or some combination of all three.
If you’d like some more in-depth information about how a reverse mortgage works, check out my article here.
How Much Can I Get On a Reverse Mortgage?
Remember that the HECM reverse mortgage offers just a portion of the value of the home. The lender isn’t buying the home, so you’re not going to receive 100% of the value. You remain the owner of the home, which is why you have to continue paying the property taxes and homeowner’s insurance as a condition of the program.
To determine how much you qualify for, the lender first establishes the maximum claim amount, which is equal to the lesser of the appraised value or the FHA loan limit.
A principal limit factor (PL factor) is then determined based on the age of the youngest borrower and the current expected interest rate. The PL factor is multiplied by the maximum claim amount to determine the principal limit (PL), which is the total pool of cash available. The principal limit is first allocated to pay existing mortgages balances, closing costs, and property taxes and insurance due. The remaining portion of the PL is then made available to the borrower in the form of term or tenure payments, lump sum, or line of credit.
Borrowers with higher home values will naturally qualify for more than borrowers with low home values.
When rates are lower, the PLs tend to be higher. In other words, the HECM offers more money when rates are lower.
PLs are also higher for older borrowers than for younger borrowers. Older borrowers tend to qualify for more.
Most HECM borrowers qualify for somewhere between 40% to 50% of the home’s value in today’s market, based on age and interest rates. Borrowers in their late 80s or older can often qualify for as much as 60% to 65% of their home’s value.
I recommend checking out our HECM calculator for a more exact estimate of how much you may be able to qualify for.