The Real Scoop on Reverse Mortgage Interest Rates, Loan Amounts and Principal Limit Factors

Recent updates to the government-insured reverse mortgage program mean loan amounts are changing—for better or worse. How do the changes play out for your situation? A reverse mortgage is a loan that enables homeowners aged 62 or older to borrow against the equity in their home without having to sell the home, give up title, or take on a monthly mortgage payment. The home equity conversion mortgage (HECM) is the most common type of reverse mortgage, and is administered through a program under the U.S. Department of Housing and Urban Development. The government determines how much borrowers are eligible for based on their age, home value and interest rate. It calculates the amount borrowers are eligible for based on “principal limit factors.” How do principal limit factors changes benefit me? Updates to principal limit factors take place for a variety of reasons, but typically occur as part of the government’s ongoing effort to make reverse mortgages safer for borrowers, says Lester Tutak, senior mortgage consultant and regional reverse mortgage specialist with Chicago-based PERL Mortgage, Inc. “The government stepped in to make the line of credit more attractive to seniors,” Tutak says of the most recent changes implemented by the federal government. In August, new changes to principal limit factors went into effect that raise the amount of proceeds for the older spectrum of borrowers in a low interest rate environment. For example, at an interest rate of 5%, the new principal limit factors increase for those who are 64 and older. At an interest rate of 6%, those who are 78 and older will see greater potential loan amounts versus before, according to the changes outlined by HUD. The recent updates follow changes made in October of last year that resulted in a roughly 15% cut across the board for all borrowers. But the way principal limit factors will impact your loan amount still rest on the basics: home value, age, and interest rate. Is a reverse mortgage right for me? The new principal limit factor changes may make a reverse mortgage more, or less attractive depending on those basic variables. While the changes greatly benefit older borrowers, those between the age of 62 and 65 now qualify for less loan amounts than they did prior to the changes. But for some, a reverse mortgage can still be a lifeline, Tutak says, adding that he has seen it help those who are both at the younger and older ends of the reverse mortgage eligibility spectrum. “It provides options,” he says. “And for some, where they’ll obtain funds in retirement is very limited. This can help someone have a better quality of life.” Why are interest rates important? The new principal limit factors are sensitive to changes in interest rate. “As interest rates increase, the principal limit factor will be reduced because the government wants to make sure there is plenty of equity and room for that growth,” Tutak says, referring to the impact interest rates have on a reverse mortgage that is taken out as a line of credit. Whatever portion of reverse mortgage credit is untouched by the borrower grows over time when receiving payouts from a reverse mortgage through a line of credit. Those who choose to receive money from a reverse mortgage as a line of credit can draw on the loan at the times and amounts of their choosing, subject to a first-year cap enforced by the government and other variables. Other methods of receiving money from a reverse mortgage include in monthly installments or in a lump sum. Before making a decision, Tutak advises meeting with a financial advisor to determine whether a reverse mortgage is right for you. “People often have a lot of questions, and it’s important to speak with someone who understands the recent principal limit factors and how they will impact the borrower’s financial situation,” he says.