So, what is the current principal limit on a reverse mortgage? It depends! The fact that you’re asking this question demonstrates an understanding on your part that the principal limit is not a set number that applies to everybody. Not many people realize this! The principal limit varies based on current interest rates and the age of the youngest borrower or non-borrowing spouse.
Before we get into how much the principal limit might be, let’s first cover some basics about what the principal limit is and how it’s calculated.
What is the principal limit?
The principal limit, or PL, is the total amount of proceeds available to a HECM reverse mortgage borrower before mandatory obligations like existing mortgages, closing costs, and property charges due at closing are paid off. The principal limit is essentially the total bag of money available through a HECM.
The money available after the mandatory obligations are paid is the net principal limit, or NPL. The NPL money is available for allocation by the borrower to term or tenure income, lump sum, line of credit, or some combination of these payout options.
How the principal limit is calculated
The principal limit is calculated by first establishing the maximum claim amount. The maximum claim amount equals either the home value or the FHA lending limit, whichever is less. Most homes are worth less than the lending limit, so the maximum claim amount usually equals the appraised value for most HECM borrowers.
The principal limit is calculated by multiplying the maximum claim amount by a principal limit factor (PL factor) selected from tables published by FHA. The appropriate PL factor is selected by the lender based on the age of the youngest borrower (or non-borrowing spouse) and the current expected interest rate. Because ages and rates vary from time to time and borrower to borrower, the principal limit also varies.
To see how the principal limit, maximum claim amount, and PL factor influence proceeds, let’s look at an example. Let’s assume we have a home worth $300,000 and the PL factor is 0.50. The home value is less than the lending limit, so the lending limit has no impact on the calculation. The principal limit calculation works as follows:
$300,000 (maximum claim amount) * 0.50 (PL factor) = $150,000 (PL)
As you can see, the principal limit works out to be $150,000. This is the gross amount of money available to pay off existing mortgages, closing costs, and property charges due at closing (among other potential mandatory obligations). The remainder is available for allocation to term or tenure income, line of credit, and lump sum.
To see how the lending limit applies, let’s assume our appraised value is $1,000,000 and the PL factor is again 0.50. Because the home value is higher than the lending limit, the maximum claim amount equals the lending limit, which we’ll assume to be $765,600 for our purposes here (the lending limit is changed by FHA periodically). The calculation works as follows:
$765,600 (MCA) * 0.50 (PLF) = $382,800 (PL)
Because the home value is higher than the lending limit, the PL equals 50% of the lending limit, not the home value. The lending limit effectively caps the home value for purposes of calculating proceeds.
What is the current principal limit on a reverse mortgage for you?
As you can see, there is no set principal limit that applies to every HECM scenario. The principal limit changes based on current rates, home value, age of the youngest borrower (or non-borrowing spouse, etc.). If you’d like a principal limit estimate, please check out our reverse mortgage calculators.