When explaining a reverse mortgage to a senior homeowner, one of the most important terms a reverse mortgage loan officer will discuss is “Equity Limit.”
What is the main limit and why is it important?
The Principal Limit (PL) is the gross amount of money that the lender is willing to lend to the borrower of a HECM Home Equity Conversion Mortgage or Reverse Mortgage, based on a formula derived from congressional legislation and implemented by the Department. of Housing and Urban Development. (HUD) and using the following three criteria:
- The lower of the Maximum Claim Limit or the Federal Housing Administration (FHA) appraised value of the home;
- The age of the youngest borrower (must be 62 years or older);
- The current expected interest rate (based on the current 10-year London Interbank Offer Rate, or LIBOR, plus a margin set for the HECM adjustable rate and based on the current fixed interest rate for the fixed-rate reverse mortgage ).
The three listed criteria affect PL in the following ways:
- The higher the value of the home (up to the maximum claim limit of $ 625,500), the higher the PL amount;
- The older the youngest borrower (age is always based on the age of the youngest borrower, not a combination of the ages of multiple borrowers), the higher the PL amount;
- And conversely, the higher the current expected interest rate, the lower the PL amount.
The reason potential borrowers should become familiar with the term Principal Limit and what it means is because it is from this cash figure that all fees and reserves will be subtracted to arrive at the maximum amount of cash or loan funds available to the borrower.
Congressional plans to lower the headline limit
Congress significantly lowered the Headline Limit for fiscal 2010 to offset a perceived budget deficit of approximately $ 798 million for HECM reverse mortgages implemented within that fiscal year. HUD has announced that for fiscal year 2011 there will likely also be decreases in the main limit. The year 2011 begins in October 2010 for budgetary purposes.
Until the budget bill has been passed through the joint Senate and House committee, voted on and signed, we don’t know what the exact amount of the cut in the capital limit will be. Senior homeowners who have investigated HECM reverse mortgages prior to October 1, 2010 should contact a reverse mortgage lender to learn how reductions in principal limits could affect them personally if they are seeking a reverse mortgage.