Hat Is One Difference Between Fixed-Rate Mortgages And Variable-Rate Mortgages Reverse Mortgages – What Does the Term Principal Limit Mean?

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Reverse Mortgages – What Does the Term Principal Limit Mean?

When explaining a reverse mortgage to a senior homeowner, one of the most important terms a reverse mortgage officer will discuss is the “Principal Limit.”

What is the base limit and why is it important?

The principal limit (PL) is the gross amount of money a lender is willing to lend to the borrower of a home equity conversion mortgage or reverse HECM, 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 or older);
  • The current expected interest rate (based on the current 10-year London Interbank Rate or LIBOR rate, plus a stated margin for the adjustable rate HECM and based on the current fixed 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 will be;
  • The older the youngest borrower (age is always based on the age of the youngest borrower, not mixing the ages of several borrowers), the higher the amount of PL will be;
  • Conversely, the higher the current expected interest rate, the lower the amount of PL will be.

The reason potential borrowers should familiarize themselves with the term Principal Limit and what it means is that it is from this amount of money that all fees and earmarks will be deducted to arrive at the maximum cash or loan proceeds available for the borrower.

Congress plans to lower the primary limit

Congress significantly reduced the principal limit for fiscal year 2010 to offset an estimated budget shortfall of approximately $798 million for HECM reverse mortgages introduced that fiscal year. HUD has announced that for fiscal year 2011, there will likely be reductions in the base limit as well. 2011 begins in October 2010 for budget purposes.

Until the budget bill passes through a joint committee of the Senate and the House, is voted on and signed into law, we do not know what the exact amount of the base limit reduction will be. Senior homeowners who investigated HECM reverse mortgages prior to October 1, 2010 should contact a reverse mortgage lender to learn how lower principal limits may affect them personally if they are pursuing a reverse mortgage.

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