How Reverse Mortgage Proceeds Are Determined
One of the first questions homeowners ask is:
“How much money can I get from a reverse mortgage?”
Many people assume the answer depends only on the value of their home. Others believe a reverse mortgage allows homeowners to borrow 70%, 80%, or even 90% of their home’s value.
Neither is true.
Like every home equity loan, a reverse mortgage makes only a portion of a home’s value available. The amount is determined using a formula established by the Federal Housing Administration (FHA) for the Home Equity Conversion Mortgage (HECM), the nation’s most widely used reverse mortgage.
Understanding how this calculation works can help set realistic expectations and explain why two homeowners with similarly valued homes may qualify for very different amounts.
The Three Factors That Determine Reverse Mortgage Proceeds
The amount available through a Home Equity Conversion Mortgage (HECM), the FHA-insured reverse mortgage, is primarily based on three factors:
1. Age of the Youngest Borrower
Age is one of the most important factors.
Generally speaking, the older the youngest borrower (or eligible non-borrowing spouse), the more money may be available.
Why?
Simply put, actuarial tables suggest the loan is likely to remain outstanding for a shorter period of time. As a result, FHA allows a larger percentage of the home’s value to be accessed.
2. Home Value
The home’s appraised value also plays an important role.
In general, higher-valued homes qualify for larger proceeds.
However, FHA reverse mortgages are subject to a maximum lending limit. If a home’s value exceeds that limit, proprietary or jumbo reverse mortgage programs may provide additional borrowing capacity. See the post below for more information:
A Better Reverse Mortgage for High-Value Homes →
3. Expected Interest Rates
This is often the least understood, yet one of the most important, factors.
The expected interest rate is used by FHA to determine how much equity can safely be made available at closing.
In general:
- Lower expected interest rates produce higher available proceeds.
- Higher expected interest rates produce lower available proceeds.
Because interest rates change over time, reverse mortgage proceeds can also change, sometimes from week to week.
Think of It as a Triangle
One easy way to understand the calculation is to picture a triangle. The three corners represent:
- Age
- Home Value
- Expected Interest Rate
These three factors are entered into FHA’s calculation, producing a number in the center called the Principal Limit.
The Principal Limit represents the total amount of reverse mortgage funds that may be available before paying off any existing mortgage or closing costs.
Why Today’s Reverse Mortgage Proceeds Are Lower Than They Were a Few Years Ago
Many homeowners and financial advisors remember a time when reverse mortgages provided a larger percentage of a home’s value than they do today.
The primary reason is interest rates.
During 2020, the 10-Year U.S. Treasury, which heavily influences the expected interest rate used for HECM calculations, was near historic lows.
Today, interest rates are significantly higher. As expected interest rates increase, FHA reduces the percentage of equity that can be made available upfront.
As a result, today’s reverse mortgages generally provide approximately 30% to 60% of a home’s value, depending on the borrower’s age, home value, and current interest rates. While that may initially sound disappointing, there is another side to the story.
Lower Initial Proceeds Can Lead to Faster Growth
Many homeowners focus only on how much money is available on day one. While that is certainly important, it’s only part of the story.
One of the unique features of a HECM reverse mortgage is that any unused line of credit continues to grow over time. The growth rate is tied to the same interest rate environment that determines the initial proceeds.
That creates an interesting tradeoff.
During periods of lower interest rates, borrowers typically qualify for larger initial proceeds, but their available line of credit grows more slowly over time. During periods of higher interest rates, borrowers generally qualify for smaller initial proceeds, but their unused line of credit grows much faster.
What the Chart Shows
The illustration below compares two hypothetical borrowers.
- The borrower who obtained a reverse mortgage in 2020 started with a larger line of credit because interest rates were exceptionally low.
- The borrower who originated a reverse mortgage in today’s higher interest rate environment started with a smaller line of credit, but because the unused line grows at a faster rate, the available borrowing capacity eventually catches up and may ultimately exceed the earlier loan.
The takeaway is simple: a smaller starting line of credit does not necessarily mean less borrowing power over the long term.
Existing Mortgages Must Be Paid Off First
A reverse mortgage must be in first lien position.
That means any existing mortgage, home equity loan, or home equity line of credit must be paid off as part of the reverse mortgage transaction.
If there are certain liens or judgments against the property, those may also need to be satisfied before closing.
These obligations are paid first from the available reverse mortgage proceeds.
What Happens to the Remaining Funds?
After paying off any required loans and closing costs, the remaining proceeds may be received in several ways:
- A growing line of credit
- Monthly income payments
- A lump sum (subject to FHA program limits)
- A combination of these options
Many homeowners choose the line of credit because any unused funds continue to grow over time, creating additional borrowing capacity for future needs such as healthcare expenses, home repairs, market downturns, or unexpected retirement expenses.
What If There Isn’t Enough Money?
Sometimes the available reverse mortgage proceeds are not enough to pay off the existing mortgage.
This situation is commonly called being “short to close.”
Fortunately, homeowners often have several options, including:
- Bringing funds to closing
- Waiting until they are older
- Waiting for interest rates to improve
- Benefiting from future home appreciation
- Exploring proprietary reverse mortgage products that may provide additional proceeds
Every situation is different, which is why an individual analysis is so important.
The Bottom Line
The amount available through a reverse mortgage is not determined by income, assets, or debt-to-income ratios the way a traditional mortgage is.
Instead, the calculation is based primarily on three factors:
- Age of the youngest borrower
- Home value
- Expected interest rate
While today’s reverse mortgages may provide a smaller initial benefit than they did during the low-interest-rate environment of a few years ago, they also create faster-growing lines of credit that may provide significantly greater flexibility later in retirement.
Understanding how these factors work together can help homeowners make more informed decisions about using housing wealth as part of a comprehensive retirement income plan.
If you’re curious how much a reverse mortgage may provide in your situation, try our free Housing Wealth Calculator at www.HousingWealthCalculator.com. If you have questions or would like to discuss your specific circumstances, feel free to contact our team. We’re always happy to help.
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- Go to www.HousingWealthPro.com and request a Housing Wealth Illustration. Give Details in the “Notes” Section including the clients’ phone # if they would like a Housing Wealth Assessment. You can also
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Related Articles:
- How Did Reverse Mortgages Get Such a Bad Reputation?
- 37 Frequently Asked Questions About Reverse Mortgages
- Why Waiting to Secure a Reverse Mortgage Could be a Costly Mistake
The content of this blog is for financial advisors and professionals only and is not intended for consumer use. Names, cases, and scenarios are fictionalized for illustrative purposes. The opinions expressed here are those of the author alone and do not reflect the views of any affiliated entities or individuals. Don Graves, NMLS #142667.
