With a reverse mortgage, there are no payments required for as long as the homeowner remains in the house. This means that the outstanding balance will grow as interest is added to the initial loan amount. On October 1, 2013, the Department of Housing and Urban Development issued revised rules for loan amounts of reverse mortgages backed by the widely used Federal Housing Administration insurance program.
Borrowing Limit Factors
The maximum amount a homeowner can borrow using a reverse mortgage is calculated based on the value of the home, the youngest borrower's age, and the interest rate that will be charged on the loan. Age 62 is the minimum age for a reverse mortgage insured by the Federal Housing Administration. The majority of reverse mortgages are originated through the FHA program. A private reverse mortgage program may use different age limitations. The younger the borrower and the higher the interest rate, the lower the percentage of a home's value that is available to borrow with a reverse mortgage.
Under the HUD and FHA guidelines, a maximum of 66 percent of a home's value can be obtained with a reverse mortgage. To get this much of the home's value, the borrower would be in his 90s and the interest rate must be 5 percent or lower. A borrower in his mid 60s with a rate between 4 percent and the low 5 percent range can borrow 50 to 55 percent of his home's value. If interest rates climb, the lending limit drops dramatically. For example, at a 7 percent rate, a 65 year old could borrow just 36.4 percent of his home's appraised value.
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First Year Borrowing Restriction
In most cases, HUD rules limit the amount borrowed during the first year to 60 percent of the borrowing limit. Reverse mortgage proceeds can be taken as a lump sum, as regular monthly payments, or as a line of credit. The 2013 revised rule prevents homeowners from taking the full amount as a lump sum when the loan is approved. As an example, if the lending limit is 50 percent of the home's value, in the first year of a reverse mortgage the homeowner could get 60 percent times 50 percent, or 30 percent of the home's value. The 60-percent limit can be exceeded if an existing mortgage or federal debts to be paid with the loan are greater than 60 percent. Enough can be drawn to pay those debts plus 10 percent of the lending limit.
Costs Reduce Total Amount Borrowable
There are significant closing costs associated with a reverse mortgage, including a loan origination fee and the FHA mortgage insurance premium. Homeowners can elect to have the costs subtracted from the available reverse mortgage proceeds. The 60-percent year-one limit is applied after the costs have been subtracted from the total. For example, using the calculator on the National Reverse Mortgage Lenders Association website and rates in effect as of December 2013, a single 65 year old homeowner with a $300,000 home could get a reverse mortgage for up to $152,100. Closing costs of $8,516 reduce that amount to $143,584. Of that amount, the calculator states that $82,744 could be drawn on the loan in the first year, leaving $60,840 as a line of credit for the following years.
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