Decoding the Principal Limit
The principal limit is the total amount you can borrow with a HECM reverse mortgage. It's one of the most important numbers in your reverse mortgage quote, and understanding how it's calculated empowers you to make better decisions.
The Three Key Factors
Your principal limit is determined by three factors: your age (or the age of the youngest borrower or eligible non-borrowing spouse), the expected interest rate, and your home's value (or the FHA lending limit, whichever is less). These three inputs determine your principal limit factor (PLF), which is the percentage of the maximum claim amount you can borrow.
Age Factor
Generally, older borrowers receive higher principal limits. This is because the loan is expected to be outstanding for a shorter period, meaning less interest will accrue. For married couples, the age of the younger spouse is used, which typically results in a lower principal limit but provides important protections for the surviving spouse.
Expected Interest Rate
Lower expected interest rates result in higher principal limits. For adjustable-rate HECMs, the expected rate is based on the 10-year benchmark rate plus the lender's margin. For fixed-rate HECMs, the note rate is used as the expected rate. Small changes in rates can have a noticeable impact on your principal limit.
Maximum Claim Amount
Your maximum claim amount is the lesser of your home's appraised value or the FHA lending limit. This figure is multiplied by your principal limit factor to determine your total principal limit. Higher home values (up to the FHA limit) mean higher principal limits.
Principal Limit Factor Tables
HUD publishes principal limit factor tables that provide the exact percentage for each combination of age and expected interest rate. These tables are updated periodically and can change as HUD adjusts the program. Your reverse mortgage advisor uses these tables to calculate your specific benefits.
Net Principal Limit
Your net principal limit is the amount available to you after subtracting closing costs, initial MIP, any LESA requirement, and any servicing fee set-aside. This is the actual amount you can access through your reverse mortgage.
