THE PRINCIPAL LOAN LIMIT
The principal loan limit is an important figure used for certain key calculations with a Reverse Mortgage. The following list contains four factors used to establish the borrower’s Principal Loan Limit, PLL:
- Age of the youngest borrower
- Maximum Claim Amount (MCA)
- The expected Interest Rate
- The age of the youngest borrower is an important determining factor of the PLL – the younger the borrower, the lower the PLL afforded to the borrower. The older your borrower the greater the PLL.
We have outlined important Reverse Mortgage terms below:
Maximum Claim Amount (MCA) – Lesser of value or lending limit. FHA lending limit is $679,650.
Origination Fee – 2% of the MCA for home values up to 200,000, plus 1% thereafter. Maximum is $6,000. Minimum is $2,500.
FHA Mortgage Insurance Premium (MIP) – Standard is 2%. Annual MIP is 0.50%
REVERSE MORTGAGE: ARM VS. FIXED:
A Reverse Mortgage has a fixed rate loan and two adjustable rate loans (ARM). With a fixed rate loan, the borrower receives all their funds in one lump sum and the interest rate is fixed for the life of the loan. With an ARM the borrower has the option to receive their funds in a variety of ways based on their needs.
ARM: VARIETY OF DISTRIBUTION OPTIONS
The interest rate can go up or down based on the Libor index. A best practice is to have a thorough discussion with all parties to determine current goals and needs as well as their long-term goals and needs.
An adjustable rate mortgage (ARM) has an interest rate which changes periodically. The one-month LIBOR rate adjusts once per month and the one-year LIBOR rate adjusts once per year. With an ARM, there are a variety of options available about how you can distribute the proceeds. The index represents the adjustable component of the ARM. The index is adjustable and indicates current economic or financial conditions. We can look at past performance of an index to predict how the index may perform in the future.
The margin represents a fixed component of the fully indexed rate. The margin remains fixed throughout the life of the loan and is added to the index at each scheduled adjustment period.
FULLY INDEXED RATE
To determine the fully indexed rate, add the the index plus the margin. This is known as the fully indexed rate. The borrower is assessed interest at the fully indexed rate. For example, your index could be 2.500% and your product margin could be 3.000%, so you’re fully indexed rate would be the combination of making it 5.500%.
LIBOR ARMs are:
- Open ended
- Adjust monthly or annually
- Many payout options
- Rate caps of 10% or 5% above the start rate (maximum rate is shown on the note)