A reverse mortgage lump sum is a single large payout at closing. The lump sum payout option is available with both primary HECM programs. The variable-rate HECM offers the lump sum, line of credit, and term and tenure payout options. The fixed-rate HECM offers just a lump sum payout.
The size of the lump sum payout, regardless of HECM product, depends on a few factors, including the age of the youngest borrower (or non-borrowing spouse), the expected interest rate, and the value of your home.
Free reverse mortgage lump sum calculator
If you would like a lump sum payout estimate, feel free to check out our reverse mortgage calculator. It’s easy to use and free! Be sure to select the “Lump Sum/LOC” option on page 4.
How a lump sum payout is calculated
To calculate a lump sum payout, we need to first determine the principal limit, which is the total pool of cash available via a HECM reverse mortgage. The principal limit is determined by multiplying the maximum claim amount (the home value for most borrowers) by a principal limit factor (PL factor) published in FHA’s principal limit factor tables.
The lender determines the PL factor to use 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, based on the expected interest rate and borrower’s age, that we are to use a PL factor of 0.50. Let’s also assume the home value is $300,000. Because $300,000 is less than the current lending limit, the maximum claim amount equals $300,000 as well.
To determine the principal limit, we simply multiply the maximum claim amount by the PL factor:
$300,000 (maximum claim amount) * 0.50 (PL factor) = $150,000 (principal limit)
The principal limit is the total pool of cash available to pay mandatory obligations such as existing mortgage balances, closing costs, and any property charges due. The remaining money once the mandatory obligations are paid can be allocated to term or tenure payments, lump sum, and line credit (depending on the HECM product you go with).
Lump sum can vary depending on loan product
FHA changed the HECM a few years ago to limit the reverse mortgage lump sum available at closing. The purpose of the change was to encourage long-term financial sustainability by preventing seniors from borrowing and using the loan proceeds too quickly. The consequence of this change is that the two main HECM products (variable-rate and fixed-rate) commonly offer vastly different payouts because of what we refer to as the 60% rule. The following details how the 60% rule applies to both of the main HECM programs.
If your mandatory obligations are less than 60% of the principal limit, you’ll be given a lump sum for the difference between the mandatory obligations and 60% of the principal limit. You will be required to take all available funds at closing whether you want them or not.
For example, if the principal limit is $100,000 and your mandatory obligations are $40,000, you’ll be given an additional $20,000 lump sum at closing. The total of the mandatory obligations and additional lump sum are $60,000, or 60% of the principal limit. No other cash will be available.
If your mandatory obligations are greater than 60%, you’ll be given an additional 10% of the principal limit (but not to exceed the principal limit).
For example, if the principal limit is $100,000 and your mandatory obligations are $80,000, you’ll be given an additional $10,000 at closing (10% of the principal limit). Again, no other cash will be available.
As an additional example, let’s assume the principal limit is $100,000 and your mandatory obligations are $95,000. Because the additional 10% would exceed the principal limit, the lump sum is limited to $5,000.
If your mandatory obligations are less than 60% of the principal limit, you can take a lump sum of up to 60% of the principal limit at closing. Any money you didn’t take from the 60% portion will still be available after closing if you wish to access it later. The remaining 40% of the principal limit will come available at the one-year anniversary of the loan.
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 (not to exceed the principal limit). Any money you didn’t take from the 10% portion will still be available after closing if you wish to access it later. The remainder of the principal limit, if any, will come available at the one-year anniversary of the loan.
Alternatives to a reverse mortgage lump sum
If a reverse mortgage offers more money than you need right now (a nice problem to have, right?), it probably doesn’t make sense to take all the available proceeds as a lump sum at closing. You may want to consider a line of credit instead. The line of credit is ideal because it gives you the same large payout as a lump sum, but you have the freedom and flexibility to borrow it only when you need it.
The available line of credit will also grow and compound larger based on a guaranteed growth rate. This gives you access to additional equity in the future automatically.
Note that the line of credit is only available on the variable-rate HECM. The fixed-rate HECM only offers a lump sum payout.
How much of a lump sum can you get?
If you would like to get a reverse mortgage lump sum estimate, check out our reverse mortgage calculator. It’s easy to use and free!