How much can I get on a reverse mortgage? Well, that depends! A reverse mortgage is not a one-size-fits-all home loan, so the amount differs from one person to the next. We’ll cover the basics of how a reverse mortgage works and how proceeds are calculated. You’ll also find links for our reverse mortgage calculators at the end of the article.
The reverse mortgage is a fantastic financial tool that lenders can tailor to your individual financial goals and needs. It’s not a one-size-fits-all mortgage product, so how much you get varies depending on the situation.
Before we dig into how proceeds are calculated, let’s first cover some basic reverse mortgage information. There is a lot of misinformation out there about reverse mortgages, so I want to make sure we set the record straight first.
How a reverse mortgage works
The particular reverse mortgage I’m referring to here is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry professionals). The HECM is 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 unique home loan that enables homeowners 62 and older to convert a portion of their home’s value into cash. No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the required property charges.
You always remain the owner of your home and you’re free to leave it to your heirs. If your heirs wish to keep the home, they can pay off or refinance the reverse mortgage balance. If they don’t want the home, they can either sell it or let the lender sell it. Your heirs will receive the remaining equity once the sale is complete and the loan balance is paid off.
The HECM is a non-recourse loan, which means the most that you or your estate will have to repay is the value of your home. FHA will cover any shortage out of it’s mutual mortgage insurance fund.
Seniors commonly use HECM proceeds to eliminate existing mortgage payments, finance home improvements, or supplement retirement income and assets.
If you’d more in-depth information about how a reverse mortgage works, check out our 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. To determine the portion 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. Next, the lender looks up the correct principal limit factor (PL factor) based on the age of the youngest borrower and the current expected interest rate. The lender multiplies the PL factor by the maximum claim amount to determine the principal limit (PL), which is the total pool of money available. The proceeds first cover existing mortgages balances, closing costs, and property taxes and insurance due. The remaining portion of the principal limit can then be allocated for term/tenure income, lump sum, or line of credit.
When rates are lower, principal limit factors tend to be higher. In other words, the HECM offers more money when rates are lower. Principal limits also tend to be higher for older borrowers than younger borrowers. Most HECM borrowers qualify for around 40% to 50% of their home’s value. If you’re on the older side, you may qualify for more. If you’re on the younger end of the curve, you may qualify for less.
Reverse mortgage calculators
If you’re ready to find out how much you can get from a reverse mortgage, check out our reverse mortgage calculators. We have a traditional reverse mortgage calculator, a HECM for purchase calculator, and a simple principal limit calculator. All are free to use and require no contact information.