What is the reverse mortgage maximum loan amount?
When you apply for and obtain a reverse mortgage on your house, there will a limit on how much you can borrow. This is done because lenders and the government agencies that insure the HECM reverse mortgages want to maintain some equity in the home for when the loan becomes due.
Your reverse mortgage maximum loan amount will be determined by the following factors:
The difference between HECMs and jumbo reverse mortgages
Most reverse mortgages are in one of two categories: Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages.
The most common reverse mortgages are HECMs. They are overseen by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA). Because they are federally regulated and insured, there are more restrictions on HECMs than on proprietary reverse mortgages.
One of the biggest differences between the two is the limit on how much your home can be worth.
HECMs place a cap of $625,500 on the full appraised value of a home. The amount of equity in your home does not matter; the cap applies to the actual market value.
For example, a person with no mortgage on a $625,500 home would have more funds available to borrow than a person with a $725,500 home who still owes $100,000.
Even though their home equity is identical, the second borrower’s home value is capped at $625,500, plus they still have $100,000 left on their conventional mortgage. Essentially, the second borrow has $525,500 in equity to use toward a reverse mortgage because of the HECM cap.
If both paid the same in closing costs of about $12,000, the first borrower would have $327,000 available in principal. The second borrower would only have $227,000 available because he or she would still have to pay the $100,000 left on the original mortgage.
Proprietary reverse mortgages, often referred to as jumbo reverse mortgage, typically do not have a cap.
You can borrow as much as a lender will offer, even if the property has a value in the millions of dollars. These loans are typically used by homeowners with property values that exceed the HECM cap, allowing them to borrow more money.
In fact, some lenders advertise reverse mortgage loan amounts more than $2 million, and it’s possible to find reverse mortgage lenders willing provide funds on properties valued at $6 million. However, some jumbo reverse mortgage lenders will limit the loan amount to 25 percent of the home’s equity, which means the borrower would need equity of $2.5 million to receive a loan amount that exceeds the HECM cap.
Another advantage of a jumbo reverse mortgage is that it does not restrict the amount borrowers can receive in the first year of the mortgage term. Borrowers can usually obtain all the loan proceeds up front, whereas HECMs limit how much money a borrower can receive upfront, called the “initial principal limit.” This limit will be based on age, the interest rate, the value of the home and the borrower’s financial assessment. Typically, an HECM will limit the upfront amount to 60 percent of the overall loan amount.
The impact of your age and home equity
How much you still owe on your home will also dictate the maximum loan amount. It’s not required to own your home free and clear before applying for a reverse mortgage, but cannot maintain a conventional mortgage and a reverse mortgage simultaneously. Whatever you still owe on your conventional mortgage will have to be repaid by the reverse mortgage funds, which cuts into a number of funds you will receive.
In general, terms, the older you are at the time of applying for the reverse mortgage, the larger the maximum loan amount. The percentage of your home’s equity that you can tap with a reverse mortgage, once fees and closing costs have been deducted, is around 50 percent at age 62. By age 70, you can get roughly 55 percent of your home’s equity and by 75 that percentage is up to 60 percent. At age 80, you could get as much as 65 percent of your home equity from a reverse mortgage.
The impact of interest rates
To help borrowers, reverse mortgage regulations began allowing fixed rate loans in 2007. A fixed interest rate loan remains constant through the life of the loan.
The main downside to a fixed interest rate is that reverse mortgage borrowers can only receive the proceeds in a lump sum. No other payment options are available with a fixed rate loan.
Also, reverse mortgage rules state that borrowers can only claim 60 percent of the loan’s principal amount in the first year, unless they are using it to pay off the existing mortgage balance. So a borrower may forfeit 40 percent of the reverse mortgage maximum loan amount just to get a fixed interest rate.
Therefore, experts typically advise that borrowers use a fixed rate reverse mortgage only in circumstances where a large lump sum is needed, such as paying off the existing mortgage or other debt, or making major repairs to the home.