How Does the Reverse Mortgage Principal Limit Work?

How Does the Reverse Mortgage Principal Limit Work? The principal limit is the total reverse mortgage proceeds available before mandatory obligations are paid. Mandatory obligations include existing mortgages, closing costs, and property charges due at closing. The remaining money is the net principal limit which you can take as a lump sum, line of credit, or monthly term or tenure plan. To calculate the principal limit, we need to first determine the maximum claim amount. The maximum claim amount equals the lesser of your home's value or the FHA lending limit. Most homes are valued less than the lending limit (which is $970,800 for 2022) so the maximum claim amount usually equals the home value. Next, a principal limit factor is obtained from tables published by FHA. The principal limit factor is selected based on your age and current interest rates. The maximum claim amount and the principal limit factor are multiplied together to calculate the principal limit. Feeling a bit lost? Not to worry! Your lender will handle all of the calculations. How about an example? Let's assume a home value of $300,000 and a principal limit factor of 0.50. $300,000 * 0.50 equals a principal limit of $150,000. This is the total amount available for mandatory obligations, lump sum, line of credit, and a term or tenure plan. Now, let's see how the FHA lending limit applies. Let's assume a home value of $1.50 million and a principal limit factor of 0.50. Because the home value is higher than the lending limit of $970,800 the maximum claim amount equals the lending limit. $970,800 * 0.50 equals a principal limit of $485,400. The lending limit caps the home value for purposes of calculating the principal limit. Let's review, shall we? The principal limit is the total amount of money available before mandatory obligations are paid. It equals a portion of your home's value based on the FHA lending limit your age and current interest rates. We hope this was informative! Please help us out by hitting the Like and Subscribe buttons! Ready to find out more about the HECM reverse mortgage? Check out our article here: https://www.myhecm.com/reverse-mortgage-101/what-is-a-hecm-reverse-mortgage/ You can find our fantastic reverse mortgage calculators here: https://www.myhecm.com/calculators/hecm-calculator-reverse-mortgage-calculator-2-0-page-1/