How Much Can You Get From a Reverse Mortgage?
Considering a reverse mortgage? Learn how much cash you can actually access from your home equity and what influences it.
A reverse mortgage is a type of loan designed for homeowners, typically aged 62 or older, that allows them to convert a portion of their home equity into cash. This financial tool differs from a traditional mortgage because it does not require monthly mortgage payments from the borrower. Instead, the loan balance grows over time and is generally repaid when the last borrower permanently moves out of the home, sells it, or passes away. Homeowners retain ownership of their property, maintaining responsibility for property taxes, insurance, and home maintenance.
Factors Influencing Your Loan Amount
The amount of money a homeowner can access through a reverse mortgage, known as the principal limit, depends on several specific factors.
The age of the youngest borrower is a significant determinant; older borrowers qualify for a higher principal limit. This is because the loan is expected to be outstanding for a shorter duration, which affects the lender’s risk assessment. If there are multiple borrowers, the age of the youngest individual on the loan is used for this calculation.
The appraised value of the home plays a role in determining the loan amount. An appraisal is conducted to establish the property’s current market value. However, the loan amount is not based on the full appraised value if it exceeds a certain federal limit.
The Federal Housing Administration (FHA) sets a maximum claim amount for Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage. For 2025, this nationwide limit is $1,209,750, meaning that even if a home is appraised for more, the loan calculation will use this cap or the appraised value, whichever is less.
Current interest rates also directly influence the principal limit. Lower prevailing interest rates at the time of application can result in a higher principal limit. Conversely, higher interest rates tend to yield a lower principal limit.
These factors are combined through a calculation involving the “principal limit factor” (PLF). The PLF is a percentage derived from the borrower’s age and the expected interest rate. This percentage is then applied to the home’s value, up to the FHA maximum claim amount.
Disbursement Options
Once the principal limit for a reverse mortgage is determined, borrowers have several options for how they can receive the funds.
One option is a single lump sum payout, where the borrower receives all available funds at once after closing. For HECMs, a fixed interest rate is typically associated with this option. Due to FHA rules, borrowers are limited to receiving 60% of the principal limit in the first year unless a larger amount is needed to pay off an existing mortgage or other mandatory obligations.
Another option is a line of credit, which allows flexible withdrawals up to the available limit. The unused portion of the line of credit grows over time, increasing the amount available for future use. This growth rate is linked to the interest rate and the annual mortgage insurance premium.
Borrowers can also opt for tenure payments, which provide fixed monthly payments for as long as at least one borrower lives in the home as their primary residence. These payments continue even if the loan balance eventually exceeds the home’s value. Alternatively, term payments offer fixed monthly payments for a specific, predetermined period.
Combinations of these disbursement options are available. For instance, a borrower might take a partial lump sum upfront and keep the remaining funds in a line of credit for future needs.
Loan Costs and Their Effect on Net Proceeds
While a reverse mortgage can provide access to home equity, various fees and costs are associated with obtaining the loan, which reduce the actual net amount of cash a borrower receives. These costs are typically financed into the loan balance or deducted from the principal limit.
An origination fee is charged by the lender for processing the loan application. For HECM loans, this fee is capped by the FHA at $6,000. Lenders may charge the greater of $2,500 or 2% of the first $200,000 of the home’s value, plus 1% of any amount exceeding $200,000, up to the $6,000 cap.
Mortgage Insurance Premiums (MIP) are another significant cost for HECM loans, insuring the loan against potential losses. There is an initial MIP, which is 2% of the maximum claim amount or the home’s appraised value, whichever is less, paid at closing. Additionally, an annual MIP of 0.5% of the outstanding loan balance accrues over the life of the loan.
Various other closing costs are also incurred, similar to a traditional mortgage. These include appraisal fees, ranging from $300 to $600 depending on the property. Other closing costs include title insurance, recording fees, document preparation fees, and potentially attorney fees. Borrowers are also required to complete a counseling session with a HUD-approved counselor, which costs between $125 and $200.
Servicing fees may also be charged by the lender for managing the loan over its term, capped at $35 per month. These ongoing fees, along with the initial costs, are added to the loan balance, reducing the amount of cash disbursed to the borrower at closing or over time. The net proceeds received by the borrower are less than the calculated principal limit.