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Understanding exactly how much you might be able to borrow with a reverse mortgage loan is critical in evaluating the reverse mortgage. In this video, you'll learn how the Home Equity Conversion Mortgage (HECM) determines the amount that can be borrowed.

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Key Factors Determining HECM Loan Payout
While learning about reverse mortgages, you may encounter the term “principal limits.” Principal limits provide a basis for the amount of money an eligible homeowner can borrow. The higher the principal limit, the more money the homeowner can borrow. With the principal limit amount, the lender pays off any existing mortgages or liens affecting the title. The remaining amount, known as the net principal limit, is what the borrower can use for any purpose, such as funding long-term care or establishing a rainy-day fund.

To determine the initial principal limit on the HECM loan, the lender needs to know three key factors:

Age: The age of the youngest borrower or eligible non-borrower spouse factors into the calculation because younger borrowers, or borrowers with a younger eligible non-borrowing spouse, will generally qualify for less HECM loan proceeds.

Rates: The long-term interest rate, or the expected rate, on a HECM loan also factors into the principal limit calculation. For adjustable-rate HECMs, lenders typically arrive at the expected rate by adding the weekly average of the 10-year Constant Maturity Treasury (CMT) index to a margin that the lender sets. Higher expected rates produce lower principal limits, while lower expected rates produce higher principal limits.

Home Value: Lenders use the lesser of the appraised home value or the 2024 HECM limit of $1,149,825. The lesser value is called the maximum claim amount (or the HECM limit).

Generally speaking, the younger the borrower, the higher the home value, the lower the expected rate — the greater the principal limit.

Why the HECM Limit Increase Is a Good Thing
With the HECM limit enhancement, borrowers with higher home values (e.g., a home worth $1.4 million) can access additional equity compared to previous years. Remember, when calculating the principal limit, lenders use the lesser of the appraised home value or the current HECM limit. The HECM limit was $1,089,300 in 2023 but is now $1,149,825 in 2024, meaning more cash may be available to the owners of high-value homes.

Here’s a hypothetical comparison of a 69-year-old borrower using the principal limit factor table supplied by the FHA and utilized by all HECM lenders. For this calculation, the home value is $1.5 million, and the expected rate is 7.0%.

2023 Available Loan Proceeds (Principal Limit): $397,594
2024 Available Loan Proceeds (Principal Limit): $419,686
That’s an increase of $22,092.

NOTE: Story is for illustration purposes only. The persons depicted herein are fictional and any resemblance to actual persons is a coincidence.

A higher principal limit can benefit those taking out a new HECM and those refinancing an existing HECM. In some cases, achieving even a slightly higher principal limit can mean the difference between being short to close (the borrower would have to bring funds to closing to cover an equity shortfall) versus not (the borrower wouldn’t have to bring funds to closing).

Chapters
00:00 Introduction
01:14 How much can you borrow with a reverse mortgage?
01:40 Appraisal determines home value
01:53 Age is a Factor
02:28 Interest Rates
02:55 Max Claim Amount
03:18 Principal Limit Factor
04:09 How we determine the Principal Limit
05:34 Age and Interest Rates Inform our Strategy
07:32 Example Scenario