How to Calculate a Reverse Mortgage
Learn the precise steps to calculate your reverse mortgage, from initial eligibility factors to net proceeds and repayment.
A reverse mortgage is a financial arrangement allowing homeowners aged 62 or older to convert a portion of their home equity into accessible funds. This type of loan enables eligible individuals to receive money without having to sell their home or make regular monthly mortgage payments. The primary purpose of a reverse mortgage is to provide financial flexibility, often used to supplement retirement income, cover living expenses, or address healthcare costs. The loan becomes due when the borrower no longer lives in the home as their primary residence, sells the property, or passes away.
Key Factors Influencing Your Loan Amount
Several variables influence the amount of money a homeowner can access through a reverse mortgage. Understanding these factors helps estimate potential proceeds.
The age of the youngest borrower plays a significant role; older borrowers generally qualify for more funds. This is because the loan is expected to be outstanding for a shorter duration, reducing lender risk.
The Expected Average Mortgage Interest Rate (EAMIR) is another crucial factor. This rate, often tied to a financial index plus a margin, directly impacts the principal limit calculation. A lower EAMIR typically allows for more available funds, while a higher EAMIR results in a lower principal limit.
The appraised home value establishes the property’s current market worth. This value, determined by an independent appraisal, is used to calculate the available equity. For federally insured Home Equity Conversion Mortgages (HECMs), there is an additional constraint.
The Maximum Claim Amount (MCA) acts as a cap on the home’s value considered for the loan calculation. For 2025, the HECM maximum claim amount is $1,209,750. Lenders use the lesser of the appraised value or the MCA in their calculations.
Determining the Principal Limit
Calculating the maximum loan amount, known as the Principal Limit, involves a specific methodology combining key factors. This limit represents the total funds accessible before deductions for costs.
Lenders utilize Principal Limit Factors (PLFs), percentages established by the Federal Housing Administration (FHA) for HECM loans. These factors are influenced by the youngest borrower’s age and the Expected Average Mortgage Interest Rate (EAMIR). Older borrowers and lower interest rates generally correspond to higher PLFs, enabling a larger principal limit.
The Principal Limit is determined by multiplying the relevant PLF by the property’s Maximum Claim Amount. For example, if a home is appraised at $700,000 and the FHA limit is $1,209,750, the $700,000 would be used. Conversely, if the home is appraised at $1,500,000, the FHA limit of $1,209,750 would be the value considered.
This calculation yields the gross amount available to the borrower. The Principal Limit sets the ceiling for funds, from which various fees and existing obligations will be subtracted.
Calculating Net Loan Proceeds
The Principal Limit is not the exact amount of cash a borrower receives. Various mandatory and optional costs are deducted from this limit to arrive at the Net Loan Proceeds, the actual amount available to the homeowner.
One significant deduction is the Upfront Mortgage Insurance Premium (UFMIP), a one-time fee for federally insured HECM loans. This premium is 2% of the lesser of the home’s appraised value or the FHA’s Maximum Claim Amount. For instance, on a property with a Maximum Claim Amount of $600,000, the UFMIP would be $12,000.
Origination fees are subtracted from the Principal Limit. These fees compensate the lender for processing the loan. For HECM loans, origination fees are capped: 2% of the first $200,000 of the home’s value plus 1% of the amount over $200,000, with a maximum cap of $6,000. For homes valued under $125,000, the fee can be up to $2,500.
Existing mortgages or liens on the property must be paid off from the reverse mortgage proceeds at closing. This includes traditional mortgages, home equity loans, or lines of credit, which reduce the net amount the borrower receives. Other closing costs, such as appraisal fees, title insurance, recording fees, and mandatory counseling fees, are also deducted.
Understanding Loan Balance Growth and Repayment
A reverse mortgage loan balance grows over time, unlike a traditional mortgage. This growth occurs because interest and other charges are added to the outstanding balance, and no monthly principal or interest payments are required.
Interest accrues on the outstanding loan balance, including previously accrued interest and fees, causing the total debt to increase continuously. The annual Mortgage Insurance Premium (MIP) also contributes to this growth, as it is typically 0.5% of the outstanding loan balance and is added to the loan amount each month. While the percentage remains constant, the dollar amount added grows as the balance rises.
The reverse mortgage becomes due and payable upon specific events: the last borrower selling the home, permanently moving out (typically for more than 12 consecutive months), or passing away. Failure to meet loan terms, like paying property taxes and homeowners insurance, or maintaining the home, can also trigger repayment.
Repayment typically occurs through the sale of the home, or heirs may choose to repay the loan from other funds or refinance it to keep the property. A significant feature of HECM loans is their non-recourse nature; the amount owed will never exceed the home’s value at repayment. If the loan balance is higher than the home’s value, mortgage insurance covers the difference, protecting the borrower or heirs from owing more than the home is worth.