The amount you are qualified to borrow is called the principal limit. The principal limit is dependent on the age of the youngest borrower, value of your home, whether you choose the fixed or adjustable rate and the expected interest rate.
The younger you are, the less you can borrow. This makes sense from the standpoint of risk. The younger you are, the longer you are going to live. The longer you live, the higher the chance of the loan balance exceeding the home’s value.
The maximum value, referred to as maximum claim amount, given to a property is $679,650. If you have a million-dollar home, loan amounts will be based off $679,650. If your home is valued at $300,000, your maximum claim amount is $300,000, and the loan or principal limit will be based off that amount.
To forecast future rates, FHA uses the 10-year SWAP rate to get an idea as to what your interest rate is expected to be. FHA adds the 10-year SWAP rate to the margin to come up with the expected rate. Once the expected rate goes beyond 3%, the amount you can borrow is decreased. If you are in a fixed rate loan, the expected rate is the same since it will be fixed throughout the life of the loan.
This is all clear as mud, right?
This chart gives you the percentages to calculate your principal limit. If you are 62 and a half, you would round up to 63. As you see on this chart, as the expected rate increases, the percentage of equity you can qualify for decreases.
Quick example: Home is valued at $250,000, you are 64 and the expected rate is 5%. Based on the chart on the following page, your principal limit would be $250,000 x 42.3% = $105,750.
Keep in mind that you may or may not have access to the entire principal limit you calculate within the first year. FHA has put limitations in place to potentially restrict access to just 60% of the principal limit in the first year with an adjustable rate mortgage, or potentially just 60% of the principal limit in total with the fixed rate option. Please refer to chapter 5 for further explanation.
You also need to understand that the principal limit is not what you will net. From the principal limit, fees are deducted for the reverse mortgage as well as any liens that need to be paid off. After the deductions, what is left over is the available principal limit.