Introdution – Defining Reverse Mortgage Loan to Value and Reverse Mortgage Principal Limit Factors
A common question asked by homeowners thinking about getting a reverse mortgage is, “how much can I get”? Or, what is the reverse mortgage loan to value available to me? Put quite simply, the Reverse Mortgage Principal Limit Factor is the amount expressed in percentage terms (relative to your appraised value) a lender will loan you based on your age or date of birth.
Basically, PLF or Principal Limit Factor is the same thing as LTV or loan to value with a traditional (forward) mortgage. Per Wikipedia “loan to value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased”. For example, if a principal limit factor for a 70 year old is 51%, then they can borrower 51% LTV. Hence, if their home is worth $100,000.00, then they can borrow up to $51,000.00.
How Is The Reverse Mortgage Loan to Value ( Reverse Mortgage Principal Limit Factors ) Calculated?
Historically, the main ingredients that determine how much a reverse mortgage borrower can get is the following; A) age / date of birth & B) the value of the borrower’s home.
However, there is a 3rd component that is part of the equation. It’s called the Expected Interest Rate (EIR). Previously (from the late 2000’s to October 1, 2017), a borrower could get their maximum loan amount for their age so long as the EIR was at or below 5.06%.
The EIR is comprised of two things; A) A margin that’s normally selected by the bank or broker. B) The weekly average of the 10 year LIBOR SWAP rate.
In recent years, the 10 year LIBOR SWAP rate has been low enough to where lenders and brokers could virtually always offer the maximum LTV available for their perspective borrowers.
Is It Still Possible to Get The Maximum Loan to Value Based on Your Age?
For now, the answer is “no”. Remember, the Reverse Mortgage LTV is based on the age of the youngest borrower, appraised value, and expected interest rate. As of the date of this blog post, the 10 Year LIBOR SWAP is at 2.39%. Hence, with the old program, a broker or lender could extend the max LTV to their borrower as long as the margin they offer is at or below 2.67%.
Aside from lowering the ongoing MIP rate and up front MIP rate, The October 2nd, 2017 Reverse Mortgage Changes also changed the HECM Expected Rate Floor from 5.06% to 3.0%. Now, this sounds good, BUT in reality it means that prospective borrowers can access less HECM proceeds than previously. Since we now need to have an EIR at or below 3.0%, it means that lenders would have to offer .61% margins to yield an EIR at 3.0%. At this time, the lowest margin any investors, lenders, or brokers can offer is about 1.875%. When you add that to the 10 year LIBOR SWAP rate you get an expected rate of 4.265%.
Here is an example:
An 80 year old can access about 57% of the home value (assuming an expected rate of 4.265% and based on 10 year swap rate this week of 2.39% and the lowest available margin of 1.875%). In other words, if the home is worth $100,000 they can borrow $57,000. However, if there were margins available that were lower than 1.7% or 1.875%, then they’d be able to access more. As a reminder, the maximum loan amount is granted if the expected rate is at 3.0%. However, there aren’t any margins available that are low enough to make that happen. If there were, the same 80 year old would be able to borrower about 65.7% of the appraised value OR $67,500 if the home is worth $100,000.00. Hopefully that part will change.
Reverse Mortgage Loan To Value, aka Reverse Mortgage Principal Limit Factors
Each week, we’ll post the most recent Reverse Mortgage Loan to Value, aka Reverse Mortgage Principal Limit Factors. The most recent will be towards the top. As you descend down the page, you will see older charts.
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Historical Reverse Mortgage Loan to Value / Principal Limit Factor Charts – Week of October 17th, 2017
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