Understanding the Reverse Mortgage Principal Limit Factor and Expected Interest Rate

Before deciding whether a reverse mortgage is right for you, it is important to consider your current and future financial goals. A reverse mortgage may be a good option if you:

• Could use additional cashflow each month to cover expenses.
• Have a plan for how you will use the loan proceeds.
• Do not plan to move or sell your home in the near future.
• Could benefit from eliminating your monthly mortgage payments. (Though you must meet your loan obligations, keeping current with property taxes, insurance, and maintenance.)
• Understand the costs and fees associated with the loan.
• Have heirs who understand how the loan may impact them.

If one or more of these statements sound applicable to you, a reverse mortgage might be the right financial tool for your retirement! So, how do you know if you might qualify for a reverse mortgage? While there are a number of different considerations, three basic requirements for revere mortgage eligibility are as follows:

• You must be at least 62 years old for FHA-insured Home Equity Conversion (HECM) reverse mortgage loans. For propriety reveres mortgage loans, like Longbridge Platinum, the minimum age drops to 55 in some states. 10
• You must have significant equity in your home.
• You must live in the home as your primary residence.

Tying it all Together

We’ve covered the expected interest rate (EIR) and principal limit factor (PL factor) and how they are used in calculating the principal limit, which is the amount of proceeds you can receive from a reverse mortgage.

Interest rates are an important part of reverse mortgage loans, but not necessarily for the reasons you may think! We know that in general a higher interest rate results in higher monthly payments. However, this can be a non-issue for reverse mortgage borrowers because their required monthly mortgage payment starts at $0 and goes up to $0! They do of course need to continue paying their property taxes and insurance and maintain their home.

So, what issue do reverse mortgage borrowers face with higher interest rates? A smaller loan amount. When interest rates go up on reverse mortgages, lenders can loan out less money to borrowers. This is by government design.

With careful consideration and the right guidance, a reverse mortgage can be a valuable financial tool for older Americans who are looking to find greater financial flexibility and peace of mind in retirement. If you’re considering a reverse mortgage, it is important to take all the different factors into account, including the principal limit factor and expected interest rate.

If you’re ready to take the next (or first) step in the process, it’s important to work with a lender who can provide you with guidance, transparency, and superior customer service. And that is where Longbridge comes in! We’re committed to helping you find the right fit for your retirement. Contact us today to get started.