How much money can I get from a reverse mortgage - YouTube

How much money can I get on a reverse mortgage that's today's focus in our how do reverse mortgages work video series?

There are currently two types of reverse mortgages: the HECM (an FHA-insured Home Equity Conversion Mortgage)

and a proprietary reverse mortgage for more expensive homes

The FHA HECM is the one you see advertised on TV

The proprietary reverse is often referred to as a Jumbo Reverse

The Jumbo Reverse mortgage was prevalent ten years ago, but it disappeared when the housing and stock market crashed in 2008

Most borrowers believe they can borrow Roughly half the value of their home

they are correct when the home is worth less than $640,000.

But when a home is worth more than $640,000, borrowers are often disappointed.

There are two reasons borrowers cannot get as much as they want or expect:

One is a function of how reverse mortgage loan limits are calculated to

Two, recent HUD changes were designed to make the reverse mortgage program more sustainable.

Understanding how maximum loan amounts are calculated requires defining terms and a little map

These are the three government terms or acronyms to know: MCA, NLL, and PLF.

MCA stands for maximum claim amount

MCA is a proxy for value, and it is defined as the lesser of:

current appraised value, National Lending Limit, or contract purchase price.

Purchase price only matters if someone is using a reverse to buy a home

Most people don't know that you can use a reverse mortgage to buy [a] house

When someone buys a house with a reverse they have no mortgage payment

Using a reverse to purchase a house is known as an H4P or HECM for purchase.

H4P help seniors downsize to a home that better suits their needs and budget

NLL stands for National Lending Limit, which was recently increased to $636,150.

NLL is an arbitrary number set by the Federal Housing Finance Agency (FHFA).

The formula to calculate how much a borrower can get is the smaller of:

the appraised value, the purchase price (if H4P), or the National Lending Limit.

If a home's value is greater than $636,000 the borrower does not get more money

this really confuses and irritates people with high value homes

Defining a home's value as a Maximum Claim Amount is a foreign concept

The reason the government set a national lending limit and a maximum claim amount

Is because they do not want to insure big reverse mortgages on high priced homes.

FHA-insured reverse mortgages were actually designed to help average homeowners access some of

their wealth to pay retirement expenses, without having to sell their house.

the National lending limit is not a limit on how much the loan balance can grow to

It only comes into play when calculating the initial loan amount or Principal Limt.

PLF stands for Principal Limit Factor.

PLFs are just numbers in a table published by HUD the Department of Housing and Urban Development

They define what percentage of a home's value someone can borrow.

When rates are low people can borrow 52% to 75% of the MCA, depending on the youngest borrower's age.

When interest rates go up, the amount people can access goes down considerably.

Some people think I'll wait until I'm older to get a reverse mortgage so I can get more money.

If rates rise, even though they're older, they'll end up getting a lot less money.

And, waiting means risking health values dropping, which would result in less money.

To calculate how much someone can borrow, known as the Principal Limit,

multiply the Maximum Claim Amount (value) times the Principal Limit Factor.

Principal Limit or (max loan amount) equals MCA times PLF. Here's an example.

A homeowner, aged 62, with a $636,150 value, can get $636,150 x 52.4% = $333,342.

Notice this is the same amount that someone with a higher value house could borrow

Remember the formula is based on the National Lending Limit or the appraisal; whichever is less.

An older borrower can access a higher percentage of their Principal Limit.

If a 90-yr old has a $636,150 house, they could borrow up to $477,112; i.e., 75%.

Jumbo reverse mortgages allow those with higher value homes to get more than with an FHA HECM... sometimes

Jumbo's offer more when a house is worth over $1.2 million and the borrower is over 70.

The following chart shows the difference in borrowing power between the FHA and Jumbo reverse.

You'll notice across the bottom are ages from 62 to 90 and on the left-hand side you'll notice the Maximum Loan Amount.

The Green line represents the Principal Limit for an FHA reverse mortgage.

The Blue Line represents the Principal Limit for a jumbo reverse.

Notice above age 70 the homeowner can access more with the jumbo Reverse

However notice that below age 70 the Jumbo offers less money.

A 2015 FHA rule change now limits how much a borrower can access in the first year.

Borrowers are now limited to accessing only 60% of their Principal Limit in year one

FHA's goal was to slow down the withdrawal rate so the money would last longer.

The only exception is when the house has an existing mortgage to be paid off

and doing so requires a loan amount greater than 60% of the Principal Limit.

With the reverse mortgage all existing home loans and liens must be paid off

Borrowers can get more than 60%, to pay off existing liens, as long as the total is less than the Principal Limit.

They can also get an additional 10% in cash, so long as the total is less than the limit.

Example One: a 62-year old has a $600,000 home that's paid off. The Principal Limit would be $314,400.

The 60% rule limits borrower proceeds in year one to $314,400 x 60% = $188,640.

At the beginning of year two, they can access the remainder: $314,400 - $188,640 = $125,760.

Example Two: a 62-year old owns a $600,000 home with a $260,000 mortgage.

They can access $260,000 to pay off the mortgage, plus 10% of their Principal Limit at closing.

So, they can get to $260,000 + ($314,400 x 10%) = $291,440 at closing.

Then, one year later, they can access the remainder, which is $22,960.

In both cases they can access the same amount $314,400, only the timing is different.

Example One was $188,640 in year one and $125,760 in year two.

Example Two: $291,440 in year one but $22,960 in year two.

These numbers do not include fees or charges paid from loan proceeds. Rates and loan limits can and do change.

For a free, no-obligation, conversation about improving your monthly cash flow, call Kent Kopen at (800) 208-1252.

Kent Kopen is a Certified Reverse Mortgage Professional. You can find out more by going to www.thereverseadvisor.com. Or, connect with him on Facebook at facebook.com/thereverseadvisor.