How a reverse mortgage actually works
Not the sales pitch and not the scary version. The mechanics of the FHA-insured Home Equity Conversion Mortgage, the protections built into it, what it costs, and what it asks of you.
What a HECM is
A Home Equity Conversion Mortgage is a loan against your home, insured by the Federal Housing Administration, for homeowners 62 and older. Instead of you making a monthly payment to the lender, the lender makes money available to you from the equity you already own. Interest and mortgage insurance are added to the balance over time rather than paid monthly. The loan is repaid, usually from the sale of the home, when the last borrower permanently leaves.
You remain the owner. Your name stays on title. You can sell at any time, pay the loan down or off whenever you like with no prepayment penalty, and leave the home to your heirs, who can keep it or sell it.
Who it's for
- Every borrower is 62 or older. A younger spouse cannot be a borrower, but may qualify as an eligible non-borrowing spouse, which can allow them to remain in the home after the borrower dies if HUD's conditions continue to be met. The protection is conditional, no new funds are advanced during that period, and the younger spouse's age reduces the amount available. I made a whole video on that rule.
- The home is your primary residence: a single-family house, an owner-occupied 2 to 4 unit property, an FHA-approved condo, or an eligible manufactured home.
- You have meaningful equity. Any existing mortgage is paid off with HECM proceeds at closing, so the more you owe, the less is left for you.
- A financial assessment of your income, credit history and obligations shows you can keep paying property taxes, insurance, and upkeep. If it raises a concern, the lender may require a Life Expectancy Set-Aside (LESA): part of your proceeds is reserved to pay property taxes and homeowners insurance. It reduces the funds available to you, and it does not cover HOA dues or maintenance.
- You complete a counseling session with an independent, HUD-approved counselor before the application is processed. That's the law, and it's a good one.
How you receive the money
How much you can borrow (the "principal limit") depends on the age of the youngest borrower (or eligible non-borrowing spouse), the home's appraised value up to the 2026 FHA limit of $1,249,125, and the expected interest rate. Older borrowers and lower rates mean more available. From there you choose how to take it:
| Option | How it works | Often chosen when |
|---|---|---|
| Line of credit | Draw what you need, when you need it. The unused portion grows every year at the loan's interest rate plus the insurance rate, and that growth can't be frozen or cancelled by the lender. | You want a reserve for later: care costs, a roof, a bad market year. |
| Tenure payments | A fixed monthly amount for as long as you live in the home, regardless of how long that is. | You want a predictable supplement to Social Security. |
| Term payments | A larger fixed monthly amount for a set number of years. | You're bridging to a pension, delayed Social Security, or a home sale. |
| Lump sum | Take an amount at closing. Fixed-rate HECMs are lump-sum only. | You're paying off an existing mortgage or a specific large expense. |
| Modified | Any combination of the above. | Most real plans. Pay off the mortgage, keep a credit line, take a small monthly payment. |
One rule to know: on an adjustable-rate HECM, first-year disbursements are generally limited to the greater of 60 percent of the principal limit or your mandatory obligations (closing costs, liens being paid off, and any required set-asides) plus 10 percent of the principal limit, never exceeding the limit itself. The rest becomes available after the first anniversary. Fixed-rate HECMs and HECM for Purchase have their own disbursement rules.
About the adjustable rate
About one in three people I talk to raise this first, so here it is. Most HECMs are adjustable-rate loans tied to a published index with caps on how far the rate can move. Because you aren't making monthly payments, a rate change doesn't change a payment; it changes how fast the balance grows, and, if you have a line of credit, how fast the unused part grows too. Fixed-rate HECMs exist but require taking everything as a lump sum at closing, which is rarely the best plan. Here's the full explanation of how HECM rates really work.
The protections
- Non-recourse. You, your estate, and your heirs never owe more than the home is worth when it's sold, even if the balance has grown past the value. FHA insurance covers the gap. That's what the mortgage insurance premium buys.
- Heirs' choice. Your heirs can keep the home by paying the lesser of the balance or 95 percent of the appraised value, or sell it and keep any remaining equity.
- Mandatory counseling by a HUD-approved third party before you can apply. Nobody, including me, can skip it.
- Eligible non-borrowing spouse rules that can let a younger spouse remain in the home after the borrower dies, as long as HUD's conditions continue to be met.
- Three-business-day right of rescission on a HECM that is not a purchase. You can change your mind after signing with no penalty.
- No prepayment penalty. Ever.
What it costs
Reverse mortgages are not cheap, and anyone who tells you otherwise is skipping something. The honest version: an upfront FHA mortgage insurance premium of 2 percent of the home's value (capped at the FHA limit), an annual premium of 0.5 percent of the outstanding balance, a lender origination fee capped by HUD at $6,000, ordinary third-party closing costs (title, appraisal, recording), counseling at roughly $150 to $300, and interest. Most of it can be financed into the loan; the counseling and the appraisal are paid before closing, whether or not the loan closes. A line-by-line breakdown is here.
The process, first call to funding
Most HECMs close in 30 to 60 days. The sequence: a conversation with me, then my numbers back to you within a business day, then application and documents, HUD counseling (you schedule it, I give you the list), rate lock, appraisal ($600 to $800, paid upfront), re-running the numbers on the real value, underwriting, conditions, clear to close, signing with a notary at the title office or your kitchen table, the three-day rescission period, and funding. If you want the long version, it's below, 14 minutes, no sign-up.
Reverse mortgage FAQ
Does the bank own my house?
No. You keep title, exactly as you would with a regular mortgage. The lender has a lien. When the loan ends, the home is sold or refinanced and the balance is repaid; anything left is yours or your heirs'. Twelve-minute video on exactly this.
Will it affect my Social Security or Medicare?
Social Security retirement benefits and Medicare are not affected; HECM proceeds are loan advances, not income. Needs-based programs such as Medicaid and SSI can be affected if proceeds sit in your bank account past the month received, so timing of draws matters. Talk to the program or an elder-law attorney before you draw if you rely on those.
Can I lose my home?
The loan becomes due if you stop living in the home as your primary residence, or if you don't keep up with property taxes, homeowners insurance, HOA dues, or basic maintenance. That's the part of a reverse mortgage that is on you, and it's why the financial assessment exists. Keep those obligations met and the loan terms allow you to stay as long as you live there.
What if the balance grows larger than the home's value?
You stay. Nothing changes while you live there. When the loan ends, FHA insurance covers any shortfall; neither you nor your heirs owe the difference. That's the non-recourse protection.
Can I pay it back early?
Yes, in part or in full, any time, with no prepayment penalty. Some people make optional payments to control the balance or to rebuild the line of credit.
Is a reverse mortgage taxable?
Proceeds are loan advances, which the IRS does not treat as income. Interest may be deductible when it's actually paid, usually at payoff. Confirm with your tax professional.
What's the catch?
Cost and compounding. The upfront insurance and closing costs are real, and because you aren't paying interest monthly, the balance grows. That's a bad trade if you plan to move in three years, and often a very good one if you plan to stay for fifteen. The job of our first conversation is to figure out which you are.
See what a HECM would actually look like for you.
Tell me your ages, your home, and what you want to accomplish. I'll run the real numbers and come back within one business day with your options, or the honest reason it doesn't fit yet.
The consultation and the options review are free. If you choose to proceed, third-party costs such as HUD counseling and an appraisal may be due before closing. Licensed in 20 states; see the full list below.
Prefer the phone? 623-698-5294, Arizona time.