The appraised value is an estimated market value for a home as developed by a licensed real estate appraiser. Theoretically, the appraised value is what a home would sell for if listed on the open market.
HECM reverse mortgage lenders use home value to establish the maximum claim amount, which is the starting point for determining how much money you can receive from a HECM reverse mortgage. The maximum claim amount always equals the appraised value or loan/lending limit, whichever is less.
Reverse mortgage proceeds are calculated by multiplying a principal limit factor (which is determined by age of the youngest borrower and the expected interest rate) by the maximum claim amount to get the principal limit, which is the total pool of funds available. The funds in the principal limit are then allocated to existing mortgage balances, closing costs, and to the borrower in the form of lump sum, line of credit, or term or tenure payments.
How the appraised value is determined
Eligible properties include 1-4 unit residential real estate and manufactured homes that meet certain criteria. The appraised value for eligible properties is typically developed using the sales comparison approach. In other words, the appraiser uses sales prices of similar homes (based on age, bedroom and bath count, condition, square footage, appeal, style, etc.) to establish a range of values. The final opinion of value will usually fall somewhere in the range based on the home’s amenities and condition.
How home value impacts proceeds
To see how the appraised value impacts proceeds, let’s check out an example. Let’s assume we have a borrower who has a $300,000 home with no mortgage balance. Let’s also assume the appropriate PL factor based on age and expected interest rate is 0.50. Because the home value is less than the lending limit, the maximum claim amount equals the appraised value. The gross proceeds (called the principal limit) are calculated as follows:
$300,000 (maximum claim amount) * 0.50 (PL factor) = $150,000 (principal limit)
This borrower has $150,000 of gross proceeds that can be used to pay off closing costs and be allocated to line of credit, lump sum, term/tenure income, or some combination of all of these options.