How much money can I get with a reverse mortgage, and what are my payment options?
This depends on the type of loan, the lender you choose, and the payment option that you select.
Most reverse mortgages today are Home Equity Conversion Mortgages (HECMs). The Federal Housing Administration (FHA), a part of the Department of Housing and Urban Development (HUD), insures HECMs. With a HECM loan, you can receive your money in one of three ways: as a line of credit, in monthly installments, or a lump sum. You can also get a combination of monthly installments and a line of credit.
Note: This webpage has information about HECMs, which are the most common type of reverse mortgage.
For a HECM reverse mortgage your lender will calculate how much you are authorized to borrow overall based on your age, the interest rate, and the lesser of the appraised value of your home or the maximum claim amount. This number is known as your initial principal limit. If you are borrowing with another person or have a non-borrowing spouse, the principal limit is based on the age of the youngest co-borrower or eligible non-borrowing spouse.
Generally, you can take out up to 60 percent of your principal limit in the first year. However, if the amount you owe on an existing mortgage (or other required payments) is more than 60 percent of your principal limit, you can take out enough to pay off your mortgage (and any other required payments, including upfront loan fees) plus additional cash of up to 10 percent of your principal limit. We refer to these amounts as your first-year draw limit.
How much money you take out in the first year can make a big difference on how much you will pay for mortgage insurance at closing. If you withdraw 60 percent or less of your principal limit in the first year, your initial mortgage insurance premium generally will be 0.5 percent. But if you withdraw more than 60 percent, it will be 2.5 percent. You must tell the lender at closing how much of the principal limit you want to withdraw the first year. So, given the increase in the amount of mortgage insurance you will have to pay, how much you take out the first year is something you need to carefully consider ahead of time.
Generally speaking, there are two types of HECM loans: adjustable rate and fixed rate.
Adjustable Rate Loan
If you take out an adjustable rate loan, you can choose three different payment options: line of credit, monthly “tenure” or “term.” You can also choose a combination of a line of credit and either the term or tenure option.
- The line of credit option allows you to draw on your loan at the times and amounts that you choose, subject to the first-year draw limit and the overall principal limit. You will only be charged interest on the amount of money you take out. You will not be charged interest on the money remaining in your credit line, which you can take out at a later date.
- The line of credit option also features credit line growth. With a line of credit, the amount that you can borrow will increase over time. The growth applies to the unused funds remaining in your credit line. The less you take out upfront, the more you will be able to borrow later.
- There are two monthly payout options. The monthly “tenure” option allows you to receive a monthly payout from your lender for as long as long as you maintain the mortgage. Note: Consider contacting a HUD-approved reverse mortgage counselor about this option because new rules governing the monthly payment option may limit the amount of money you receive. During the first year, your payments will be subject to the first-year draw limit.
- The monthly “term” plan is a similar option, but you only receive the monthly payout for a fixed number of years. The payouts will be larger than under the “tenure” option, and you get to choose how many years you would like. During the first year, your payments will be subject to the first-year draw limit.
- Combination option. You can combine a line of credit with either the monthly tenure or monthly term payouts. The credit line growth feature is factored in the monthly payout amount. These are sometimes referred to as “modified tenure” or “modified term” payment options.
Once you have selected a payout option, you may be able to change it for a fee—as long as you haven’t drawn all of your funds already.
Fixed Rate Loan
Unlike an adjustable rate loan, if you choose a fixed interest rate, you will receive your entire loan proceeds as a lump sum payment. However, you will only be able to access the amount permitted under the first-year draw limits. The remaining loan amount is forfeited. This means most borrowers will not be able to borrow as much with a fixed-rate, lump-sum loan as they could with an adjustable-rate, line of credit or monthly payout option.
Some lenders may offer reverse mortgages that are not insured by the FHA. Those are sometimes called proprietary reverse mortgages. If you are considering a proprietary reverse mortgage, make sure you understand your options for receiving your money, as they may differ from the options for HECM loans.
If you or your parents are considering a reverse mortgage, make sure you get all the facts first. We have several resources to help you learn more about reverse mortgages. Check out:
- Reverse Mortgages: a discussion guide from the CFPB’s Office for Older Americans
- Answers to common questions about reverse mortgages
- A video for an overview of reverse mortgages
Talk to a HUD-approved reverse mortgage (HECM) counselor. Visit HUD's counselor search page or call HUD's housing counselor referral line at (800) 569-4287.