A reverse mortgage allows you to borrow against the equity in your home. The principal limit is the maximum amount that you can receive from the reverse mortgage. This amount is determined at closing, and you are entitled to elect the payment option for how the funds will be disbursed to you. To acquire an increase in the loan amount of the reverse mortgage, you have the option to refinance your existing mortgage.
Three main payment options allow you to tailor your disbursements according to your financial goals. You can choose a monthly tenure plan, in which you receive equal monthly payments for as long as you live in the home. The monthly term plan allows you to receive equal monthly payments for a fixed term. With a line of credit, you can request disbursements until you reach the principal limit. Other options allow you to choose a modified payment plan, such as a plan that combines term payments and a line of credit.
When you have received all of the payments that equal the amount of the principal limit plus accrued interest and fees, you can't receive any further payments under the reverse mortgage loan. If you are interested in increasing the loan amount and borrowing against additional equity in your home, you have the option to refinance your reverse mortgage. Many homeowners choose to refinance reverse mortgages for several reasons, such as a Federal Housing Administration lending limit increase or a decrease in interest rates. The lender will consider the outstanding balance of the current loan, the principal limit and the maximum claim amount. The lender will also take into account the current value of the home in addition to the borrower’s age.
The principal limit is determined by a calculation using certain factors, such as the age of the borrower, appraised value of the property, mortgage interest rate and mortgage insurance premiums. Federally insured Home Equity Conversion Mortgage lenders must use the Department of Housing and Urban Development-approved calculations to determine the original principal limit. Some private insurance lenders also align their formulas with the HUD calculations.
Changing Payment Options
After closing on your reverse mortgage loan, you have the option of changing payment plans at any time. For instance, if you have selected a tenure plan, with which you receive periodic payments as long as you occupy the home, you can change to a term plan, a line of credit or modified payment plan, or you can receive a lump sum payment. You may also suspend periodic payments for a while, lower your payments or increase payments. Based upon the original loan amount, changes may be made at any time as long as the changes do not exceed the principal limit.
Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.