How reverse mortgage loan amount is calculated on an HECM
Reverse mortgage borrowers who opt for a federally insured Home Equity Conversion Mortgage (HECM) will be limited on how much they borrow.
A reverse mortgage principal limit is based on three factors at the time you apply for the loan: your age, the total equity of your home (its appraised value minus any mortgages or liens on the property), and market interest rates.
How is the specific principal limit determined? The Department of Housing and Urban Development maintains a chart that shows Principal Limit Factors (PLFs) for different ages and expected interest rates.
The impact of age and interest rates
Reviewing the charts can show a potential borrower the impact that age and interest rates have on the amount one can borrow.
For example, if the expected interest rate is 5 percent, a 62-year-old can borrow an amount equal to 52.4 percent of their home’s available equity because the PLF under that scenario is 0.524. The PLF increases to 0.542 for a 65-year-old, which means a borrower that age can get 54.2 percent of their equity. At 70, the PLF is 0.576 and it’s 0.657 by age 80. It maxes out at 0.750 at age 90, which means a 90-year-old can borrow a maximum of 75 percent of their home’s equity.
PLFs increase with age up to age 90; there are no increases in the PLF after age 90.
Changes in the expected interest rate have an equivalent impact on the borrowing amount. A 66-year-old borrowing at an expected rate of 5 percent can obtain an amount equal to 54.9 percent of their home’s equity. If the expected rate increases to 5.125 percent, the PLF falls to 0.533. At 5.5 percent, the PLF drops to 0.485 and at 6 percent it goes down to 0.421.
As its name implies, the expected interest rate is what the lender anticipates the loan rate averaging over the life of the reverse mortgage. It’s one of three factors, in addition to your age and the value of the home, that helps determine how much of your home’s equity you can borrow.
The lender will arrive at that rate based on the average yield for U.S. Treasury securities adjusted to a constant maturity of 10 years, or the 10-year rate on the London Interbank Offered Rate (LIBOR) Index. The expected rate is just a projection. The actual interest you pay when the loan becomes due will be based on actual interest rate movements during the course of the loan.
The interest rates used in the HUD PLF tables also factor the lenders margin, which is an amount added to market interest rates to determine the total variable loan rate for a given period. For example, a lender may set its margin at 2 percent. If the LIBOR Index is 2.5 percent, the variable loan rate charged during that period will be 4.5 percent (2 + 2.5). If the LIBOR Index rises to 5 percent, the reverse mortgage interest rate will also rise, to 7 percent.
Separate PLFs for Non-borrowing spouses
HUD has two charts. One is for scenarios in which one or both borrowers are at least age 62, the minimum age required to obtain a reverse mortgage. There is also a “Special Table” that provides PLFs for eligible borrowers with non-borrowing spouses who have not reached age 62.
Why does HUD maintain a PLF table for ages below the minimum of 62? A change in the law in 2014 provided increased protection to spouses who are not named on a reverse mortgage contract. Today, spouses who are not listed on the reverse mortgage because they had not reached age 62 can remain in their homes after the death of the borrower by being designated Eligible Non-Borrowing Spouses.
Although non-borrower spouses will not have access to any remaining loan funds after the borrowing spouse has died, they also do not have to repay the loan right away. However, interest will continue to accrue on the unpaid balance until the loan is repaid.
How much do younger spouses impact a PLF? A 64-year-old single borrower with an expected interest rate of 5 percent can obtain 53.6 percent of their home’s equity. If the same borrower with the same rate has a 58-year-old spouse, the borrowing limit drops to 50 percent. It falls to 44.3 percent if the non-borrowing spouse is between the ages of 45 and 49, and all the way to 31.7 percent if the non-borrowing spouse is age 18 or 19.
PLFs are periodically adjusted. In 2013, new PLFs introduced by HUD resulted in a roughly 15 percent reduction in principal limits for most borrowers. A year later, in addition to adding non-borrowing spouses, the PLF tables raised the amount of proceeds available for older borrowers in low-rate environments, while reducing PLFs for most HECMs set at higher interest rates.