PLP - Principal Limit Factor
Print This Post
Principal limit factor is a term used primarily in conjunction with the HUD home equity conversion mortgage (HECM) program, the most popular reverse mortgage program. The term is best understood if broken into components:
1. The principal limit of a HECM is the lesser of the appraised value of the home or the FHA “203b” limit that varies by geographic location;
2. A principal limit factor is then applied to adjust the maximum loan amount according to the age of the youngest borrower and the expected mortgage interest rate. These factors are actuarialy detemined - i.e. the older the borrower, the higher percentage of principal limit can be obtained through a reverse mortgage. Following is a sample of principal limit factors:
Sample HECM Principal Limit Factors Age Interest Rate 7% 9% 62 .457 .302 75 .609 .472 85 .738 .636
As example, a 62 year-old borrower with a $225,000 home could qualify for a loan of $102,825 after applying the principal limit factor (.457 x 225,000 = 102,825). A 75 year-old could qualify for a $137,025 under the same assumptions. These examples are oversimplified but help illustrate the main effects of the principal limit factor: 1) the older the borrower, the greater the loan amount and 2) the higher the interest rate, the smaller the loan amount.
A big selling point for reverse mortgage programs is the promise that payments will be made until the borrower dies or sells the home. The principal limit factor is the mechanism that helps protect the lender by scaling back the original mortgage amount to a level that provides reasonable assurance that, on a future date when the final loan balance (principal amount + accrued interest + financed costs) is due, the loan balance won’t exceed the equity value of the home. It remains possible that the final loan balance will exceed the home’s equity, but the principal limit factor reduces the odds of this happening.
A Few More Related Articles of Interest: