How Much Money Can You Borrow from a Reverse Mortgage?
By: Abigail Baart
November 30, 2023 • 8 minute read
Reverse mortgages are a popular way for those in retirement to access the equity they’ve built up in their home without having to sell their home. It’s one way that older homeowners who are looking to retire in place are able to supplement their retirement income.
But before applying for a reverse mortgage, one important question to answer is: how much will you be able to get?
While the best way to get specific numbers on how much you can get from a reverse mortgage is from directly with a reverse mortgage lender, this article will walk you through all the factors that play a role in determining your final payout, how to use a reverse mortgage calculator, and the different options for receiving your reverse mortgage funds.
How Does a Reverse Mortgage Work?
A reverse mortgage is a cross between a traditional mortgage and a home equity loan or home equity line of credit but with some key differences.
A reverse mortgage, also known as a home equity conversion mortgage (HECM), is a loan that is only available to homeowners who are 62 years of age or older. It is backed by the Federal Housing Administration (FHA) and regulated by the U.S. Department of Housing and Urban Development (HUD).
It allows borrowers the ability to convert a portion of their equity into cash without requiring monthly mortgage payments to pay it back.
Reverse mortgage borrowers have the option to receive their funds as a lump sum, line of credit, and/or monthly payments.
A reverse mortgage can only be used on a property that is the primary residence of the homeowners. The home must also be a single-family home, a two-to-four-unit property in which the homeowners occupy one of the units, or an FHA approved condominium, townhouse, or manufactured home. Homeowners must also have equity built up in the home.
There is a misunderstanding that when a homeowner takes out a reverse mortgage that the bank is buying the home from them, but this is not the case. The borrowers are still the owners of the home. This also means the homeowners are also still obligated to pay the property taxes, homeowners’ insurance, and maintain the home.
Borrowers pay back the reverse mortgage when they sell the home, they no longer live in the home full-time, or when the last remaining borrower passes away.
The Factors: How Much Can You Get from a Reverse Mortgage?
There are several factors that come into play when determining how much you will be able to get from a reverse mortgage, which is one of the reasons this can be a complicated question to answer.
We will break down each factor one by one so that you will have a clear understanding of the role each one plays.
One key factor that plays a role in how much you are able to get from a reverse mortgage is age. In order to obtain a reverse mortgage, homeowners must be at least 62. When calculating how much you are able to borrow, lenders will base it on the age of the youngest borrower or the eligible non-borrowing spouse.
As a rule, the older the borrower, the more he or she will be able to borrow.
This fact may lead some to believe that they should wait until they are older to obtain a reverse mortgage, but several retirement experts now believe that there are benefits to getting a reverse mortgage earlier on in retirement versus waiting until later.
Current interest rates also play a direct role in how much money you are able to borrow. With lower interest rates, you are able to borrow more. On the contrary, when interest rates are high, it will impact how much you will receive from a reverse mortgage loan.
Value of the Home and Equity
Another key factor when determining how much you are able to receive from a reverse mortgage is the home’s value because this will determine how much equity you have in the home. This is important because the amount of money you are able to borrow is based on how much equity you have in your home.
Equity is defined as the amount of money leftover when you subtract the amount of money you owe on the home from the current market value of the home. If your mortgage is paid off, then the entire market value is the equity you have in the home.
FHA Lending Limit
The FHA puts a limit on how much homeowners are able to borrow from a reverse mortgage loan. As of 2024, the FHA lending limit for HECM reverse mortgage loans is $1,149,825.
That means that the maximum amount you can borrow from a reverse mortgage cannot exceed that amount.
If you have a home that is worth a lot more than that, most major lenders offer a proprietary reverse mortgage that are jumbo reverse mortgages. While the maximum amount homeowners are able to borrow through these loans will vary from lender to lender, some lenders offer jumbo loans for as much as $4 million.
There are some costs to be aware of when taking out a reverse mortgage. These include a mortgage insurance premium, an origination fee, and closing costs.
The origination fee cannot exceed $6,000, and some lenders may waive this fee.
Your Options for Receiving Your Reverse Mortgage Funds
Another factor that can affect how much money borrowers are able to receive from a reverse mortgage is how they decide to receive their funds. Qualifying homeowners have the option to receive the money as a lump sum, line of credit, and/or monthly payments.
Here is a breakdown of how each option works and important features to know about them.
Lump Sum Payment
As the name implies, a lump sum payment is exactly how it sounds: a single payout that goes to the borrowers once the loan closes. A lump sum may be ideal if someone is looking to use the money for a large project such as a home renovation.
One pro to the lump sum option is that it’s the only type of reverse mortgage that comes with a fixed interest rate.
However, one downside has to do with what’s called the principal limit rule. According to the principal limit rule, borrowers can only receive 60 percent of the total loan proceeds in the first year of the loan.
After that, they will not be able to receive the remaining 40 percent if they are only receiving their money as a lump sum.
One way to overcome this limit is to combine a lump sum payout with another option such as a line of credit or monthly payments.
Reverse Mortgage Line of Credit
The reverse mortgage line of credit may be ideal for those who want a reverse mortgage to use to cover unplanned expenses because it allows you to use the money as you need it.
One advantage of a line of credit is that you only pay interest on what you use, and the unused loan balance actually grows.
The principal limit rule also applies to the line of credit option.
Reverse Mortgage Monthly Installments
The reverse mortgage monthly installments may be ideal for those who are looking to use a reverse mortgage to supplement their monthly income.
Borrowers have two options for how to receive their funds as monthly payments: tenure payments and term payments.
Term payments are paid out for a fixed number of years. This is ideal for those who know how long they plan to remain in the home. Tenure payments are received as long as the borrower remains in the home.
One key difference between these two choices is that term payments tend to be higher than tenure payments.
Reverse Mortgage Calculator
If you want to get a concrete idea of how much you may receive from a reverse mortgage, we recommend using our reverse mortgage calculator.
To use the calculator, simply enter your estimated home value, your current mortgage balance, and the age of the youngest borrower.
It’s important to note that the number provided by this calculator is merely an estimate.
Can I Get a Lump Sum from a Reverse Mortgage?
Yes. Reverse mortgage borrowers have several options for how they can receive their reverse mortgage proceeds including a lump sum, monthly payments, a line of credit, or a combination of those options.
How Long Does It Take to Get Money from a Reverse Mortgage?
The reverse mortgage application process can take up to 45 days. After the closing loan documents are signed, there is a three-business day waiting period before borrowers can start receiving their funds.
What About Your Credit Score?
When you take out a traditional mortgage, your credit score plays a vital role in determining both your interest rate and how much the lender is willing to lend you. One of the reasons for this is because the lender wants to make sure that you are going to be able to make your mortgage payment each month. It also wants to know how risky it will be to lend money to you.
With a reverse mortgage, it is possible to get approved for a loan with a low credit score because a reverse mortgage is not paid back with monthly mortgage payments, making that factor not as critical.
How Much Equity Can You Get Out of a Reverse Mortgage?
Reverse mortgage borrowers typically receive approximately 40 percent to 60 percent of the appraised market value of the home. The amount you are able to borrow is called the principal limit. This principal limit is determined by taking into account the value of the home, the interest rate, and the age of the youngest borrower.
The best way to receive a more accurate estimate of how much you might be able to receive from a reverse mortgage is to talk to a reverse mortgage loan officer. To get started, check out our list of featured reverse mortgage lenders here.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.
If your heirs want to keep the home after your death, they will have to repay the either the full loan balance or 95% of the home’s appraised value, whichever is less.
Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA Fees