Reverse Mortgage Glossary
Reverse Mortgage Lump Sum
The reverse mortgage lump sum option enables you to take a large chunk of money at closing to use for whatever you need. Many reverse mortgage clients use the lump sum to eliminate other debts, do home improvements, purchase a new vehicle, or build up an emergency fund.
And because this is a HECM reverse mortgage we’re talking about, the money you borrow doesn’t have to be repaid for as long as at least one borrower is living in the home and paying the required property charges (property taxes, homeowner’s insurance, etc.).
The HECM reverse mortgage offers two different programs, the variable-rate HECM and the fixed-rate HECM. Which program you choose may impact the total proceeds available and how you can receive them. The variable-rate HECM offers options to take proceeds as a lump sum, line of credit, monthly term or tenure payments, or some combination of all of these. The fixed-rate HECM offers only a lump sum payout.
The 60% Utilization Rule
FHA made an important change a few years ago that limits how much of a reverse mortgage lump sum you can access in the first 12 months of the loan. The following is a rundown of how this rule impacts both HECM products:
- Fixed-rate HECM: If your mandatory obligations (such as existing mortgage balances, closing costs, taxes due, etc.) are less than 60% of the principal limit (the total pool of cash you qualify for), you’ll be given a lump sum for difference between your mandatory obligations and 60% of your principal limit. No other cash will be available. If your mandatory obligations are greater than 60%, you’ll be allowed to take up to an additional 10% of the principal limit at closing up to the principal limit itself. Again, no other cash will be available.
- Variable-rate HECM: If your mandatory obligations are less than 60% of the principal limit, you’ll be allowed to take a lump sum up to 60% of the principal limit at closing. The remaining 40% of the principal limit will come available at the one-year anniversary of the loan in the form of a line of credit. If your mandatory obligations are greater than 60%, you’ll be allowed to take up to an additional 10% of the principal limit at closing (if available). The remainder of the principal limit, if any, will come available at the one-year mark.
The idea behind this rule is to encourage longer-term financial sustainability for reverse mortgage borrowers by preventing them from burning through the proceeds too quickly and having nothing left.
Note that a higher IMIP rate will apply if your mandatory obligations are greater than 60% at the time of loan origination.
Only take money as a lump sum if you really need it for immediate use, such as home improvements or paying off other debts. It doesn’t make sense to pull out the money, accrue interest on a larger loan balance, and just leave it sitting in a checking or savings account earning little to no interest.
A better option might be to go with a line of credit, which is only available on the variable-rate HECM. You can pull out money whenever you need it and interest accrues only on what you’ve used. On top of that, your available credit will grow and compound larger based on a growth rate, which gives you access to even more money over time.