The principal limit, or PL, is the total amount of proceeds available to a HECM reverse mortgage borrower. Think of it like your paycheck before the deductions come out. The principal limit is the gross pool of cash available before mandatory obligations like existing mortgages, closing costs, and property charges due at closing are paid off.
The remaining money after the mandatory obligations are paid (the net principal limit) can be allocated to term or tenure income, lump sum, line of credit, or some combination of all of these payout options.
How the principal limit is calculated
To calculate the principal limit, we need to first establish the maximum claim amount. The maximum claim amount is equal to the appraised value of the home or the lending limit, whichever is less. Most HECM borrowers have homes worth less than the lending limit, so the maximum claim amount is usually equal to the appraised value.
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 lender selects the appropriate PL factor based on the age of the youngest borrower (or non-borrowing spouse) and the current expected interest rate.
To see how this works, let’s check out an example. Let’s assume that we’re working with a home value of $300,000 and the appropriate PL factor is 0.50. The calculation works as follows:
$300,000 (maximum claim amount) * 0.50 (PL factor) = $150,000 (PL)
In this example, the principal limit is $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 can then be allocated by the borrower to term/tenure income, line of credit, and so forth.
To see how the lending limit applies, let’s assume an appraised value of $1,000,000 and the same PL factor of 0.50. Because the home value is higher than the lending limit, the maximum claim amount equals the current lending limit of $765,600. 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.
If you’d like to estimate how much you can get from a reverse mortgage, be sure to check out our reverse mortgage calculator.