The first-year limit of a HECM, line by line

Lines 17 to 21 of the HUD payment plan

HUD's payment plan form, Exhibit 1 to the loan agreement, computes the first-year cap in five lines. Line 17 is 60 % of the principal limit. Line 18 is the mandatory obligations (line 10) plus 10 % of the principal limit. Line 19 keeps the greater of the two. Line 20 is the principal limit minus the servicing fee set-aside and the part of any life expectancy set-aside meant for after year one. Line 21, the initial disbursement limit, is the lesser of lines 19 and 20, and never more than the principal limit. The Handbook writes the same rule in words: the lesser of the greater of 60 % or obligations plus 10 %, and the principal limit less those set-asides.

Mandatory obligations are the charges required to close: upfront mortgage insurance, the origination fee and other closing costs, mortgages and liens paid off, a repair set-aside, and first-year tax and insurance payments from a set-aside. They are subtracted from the initial disbursement limit first; what remains is yours to draw during the first year.

Six payoffs on one $450,000 home

The table keeps the same borrower, 67 years old with a $450,000 home and an expected rate of 6.65 %, and changes only the mortgage to pay off. Upfront insurance ($9,000) and the maximum origination fee ($6,000) are in every row.

Obligations under half: the 60 % branch

With no mortgage, the obligations are only $15,000, and line 17 ($98,550) is far above line 18. The borrower can draw $83,550 in the first year. With a $40,000 payoff, line 17 still wins, and every dollar of payoff comes straight out of first-year cash: $43,550. In this branch the rest of the principal limit, $65,700, waits for month 13 whatever the payoff, because it is the 40 % that line 17 locks.

Month 13: what opens up

The first-year limit delays money; on an adjustable HECM it does not remove it. The part locked by line 17 stays in the principal limit, and the principal limit grows each month by one twelfth of the note rate plus the annual premium. For the borrower with a $40,000 payoff, the $65,700 held back at closing is worth about $70,093 of credit when the first year ends, at a note rate of 5.99 %. Whatever was left undrawn from the first-year room is still there as well. A borrower who needs a large sum soon after closing is therefore the one most affected by the rule, and a borrower who wants a reserve for later barely notices it. The line of credit page follows that growth over many years.

Obligations over half: plus 10 %

The Handbook gives up to an additional 10 % of the principal limit when mandatory obligations exceed 50 % of it. On this home that happens once the payoff passes about $67,125. From there, line 18 is larger than line 17, and the borrower gets the obligations paid plus 10 % of the principal limit, $16,425, no matter how large the payoff is. With $120,000 to pay off, that leaves only $12,825 for later. The extra amount has to be elected at closing, and the election is fixed for the year.

Before October 2017, crossing 60 % in the first year also changed the price of the loan: under Mortgagee Letter 2014-21 the upfront premium was 0.5 % of the claim amount when first-year draws stayed within 60 % of the principal limit and 2.5 % above it. Mortgagee Letter 2017-12 ended that link, and the premium is now 2 % of the maximum claim amount in every case.

Obligations over the principal limit: cash at closing

When the obligations exceed the principal limit, the HECM cannot pay them all. The Handbook puts the cash needed to close at the difference between the mandatory obligations and the principal limit, and the payment plan records it on line 11, cash from the borrower. With a $160,000 payoff, the obligations reach $175,000 against a principal limit of $164,250: $10,750 must be brought to closing, and nothing is left to draw, now or later. The existing mortgage page looks at this case in detail.

Fixed rate: one advance at closing

A fixed-rate HECM has a single lump sum payment option, limited to one disbursement at closing. The same first-year rule sizes that advance. With a $40,000 payoff, the borrower receives $43,550 at closing, exactly what the adjustable loan allows in year one, but the remaining $65,700 is never available. On an adjustable HECM, that amount would open after 12 months and keep growing.

Set-asides act through line 20. A servicing fee set-aside or the part of a life expectancy set-aside meant for later years lowers line 20, and if line 20 falls below line 19 it becomes the limit. The full calculator prints every line with your numbers.