Enter the appraised home value, current mortgage balance, and (optionally) a principal limit factor (PLF) to estimate a reverse-mortgage principal limit and your estimated net available proceeds. If you don’t know the PLF, you can enter the youngest borrower’s age and an expected interest rate to use a rough PLF estimate (this is not a lender quote).
Reverse Mortgage Formula
Reverse mortgages (such as U.S. HECM loans) are commonly described using a principal limit and then a net available proceeds calculation. A simplified representation is:
\begin{aligned}
PL &= \min(HV, MCA)\times PLF \\
NAP &\approx PL - MO
\end{aligned}- Where PL is the Principal Limit ($)
- HV is the Appraised Home Value ($)
- MCA is the Maximum Claim Amount cap (for HECM, it is the lesser of the home value and the FHA maximum claim amount for that year) ($)
- PLF is the Principal Limit Factor (unitless multiplier from HUD tables; depends on the youngest borrower’s age and the expected rate)
- MO is Mandatory Obligations (e.g., existing mortgage payoff and other required liens/set-asides/financed costs) ($)
- NAP is Net Available Proceeds (an estimate of what may be available after mandatory obligations) ($)
In words: estimate the principal limit by multiplying the applicable value (the lesser of the appraised value and the program cap) by the principal limit factor, then subtract mandatory obligations to estimate net available proceeds. Actual loan proceeds can also be affected by closing costs, mortgage insurance premiums, and required set-asides.
What is a Reverse Mortgage?
Definition:
A reverse mortgage is a loan available to eligible homeowners (often seniors) that allows them to convert part of their home equity into cash. Repayment is generally deferred until the borrower no longer occupies the home as a primary residence, sells the home, passes away, or otherwise fails to meet loan obligations (such as paying property taxes and insurance).
How to Calculate Reverse Mortgage?
Example Problem:
The following example outlines the steps and information needed to estimate reverse mortgage proceeds.
First, determine the home value. In this example, the property is appraised at $300,000.
Next, determine the principal limit factor (PLF). Based on the youngest borrower’s age and the expected interest rate (per HUD tables), assume the PLF is 0.5 for this example.
Then, find the mandatory obligations. Here, assume the current mortgage balance that must be paid off is $50,000 (and assume $0 in other required obligations/financed costs for simplicity).
Finally, calculate the principal limit and net available proceeds using the formulas above (and assuming the home value is below any applicable maximum claim amount cap):
PL = min(HV, MCA) × PLF
PL = $300,000 × 0.5 = $150,000
NAP ≈ PL − MO
NAP ≈ $150,000 − $50,000 = $100,000
FAQ
What factors can affect how much money I can borrow with a reverse mortgage?
Key factors include the appraised value of your home, the program’s maximum claim amount cap (if applicable), your current mortgage balance and other mandatory obligations, interest rates, and your age (typically the youngest borrower’s age). Generally, older homeowners may qualify for higher principal limit factors, and interest-rate conditions can influence available funds.
Do I still own my home with a reverse mortgage?
Yes, you maintain homeownership as long as you fulfill the loan obligations, including keeping up with property taxes, homeowner’s insurance, and maintenance. The debt is typically repaid when the last borrower moves out, sells the home, or passes away (or if loan obligations are not met).
Is a reverse mortgage right for me?
A reverse mortgage can be a tool for generating retirement income by leveraging home equity, but it can reduce remaining equity for heirs and may include significant fees and ongoing obligations. It’s best to speak with a qualified reverse-mortgage counselor and/or financial advisor to understand how it fits into your financial plan.