Reverse mortgage explained: how HECMs work, who they suit, and the risks
A reverse mortgage lets homeowners 62+ convert home equity into tax-free cash without selling. This guide covers HECM loan mechanics, payout options, what triggers repayment, the costs involved, and when a reverse mortgage makes sense — or doesn't.
A reverse mortgage is one of the least understood mortgage products — simultaneously one of the most useful tools for cash-strapped retirees and one of the most misused. The HECM program insured by FHA has been reformed significantly since 2013, but misconceptions (particularly around inheritance) remain common. This guide explains exactly how HECMs work — mechanics, costs, triggers, and the scenarios where they make financial sense.
How a HECM works: the core mechanics
Must be 62+, primary residence, no delinquent federal debt, and complete HUD counseling.
Based on your age, home value, and current interest rate. Typically 45–60% of home value at age 70–80.
Choose lump sum, monthly payments, a line of credit, or a combination. The loan balance grows as interest accrues.
Sale, permanent move-out, death, or failure to maintain taxes/insurance. FHA insurance covers any balance exceeding home value.
HECM vs proprietary reverse mortgage
| Feature | HECM (FHA-insured) | Proprietary (jumbo) |
|---|---|---|
| Age minimum | 62 | Varies (some accept 55) |
| Max home value | $1,209,750 FHA limit | Up to $10M+ |
| MIP | 2% upfront + 0.5%/year | None |
| FHA insurance benefit | Yes — heirs not liable above home value | No |
| HUD counseling required | Yes | Varies by lender |
| Best for | Homes up to ~$1.2M | High-value homes |
When a reverse mortgage makes sense — and when it doesn't
- You plan to stay in the home long-term and need income supplement
- You want a growing line of credit as a retirement safety net
- Your heirs don't need the home — they'll sell and split proceeds
- You're "house rich, cash poor" with a paid-off or nearly paid-off home
- You want to delay Social Security for a larger benefit
- You plan to move within 5 years — costs won't be recovered
- You want to leave the home to heirs mortgage-free
- A co-borrower under 62 is on the deed (they'd lose the home on your death)
- You have low equity — little to draw after paying off existing mortgage
- Significant home maintenance is deferred — MPR failures can block approval
The CFPB's reverse mortgage guide includes a checklist of questions to ask before signing a reverse mortgage agreement.
External references
- HUD — HECM program overview and counselor directory
- CFPB — What is a reverse mortgage?
- CFPB — Reverse mortgage cost breakdown
- CFPB — Reverse mortgage payout types
- National Institute on Aging — Reverse mortgage overview for seniors
- Investopedia — Reverse mortgage guide
Common questions
What is a reverse mortgage and how does it work?
A reverse mortgage is a loan against your home equity where no monthly payments are required. Instead of you paying the lender, the lender pays you (or extends a credit line). The loan balance grows over time as interest and fees accrue. Repayment is triggered when you sell the home, move out permanently, or die. The most common type is the HECM (Home Equity Conversion Mortgage), insured by FHA. The CFPB's reverse mortgage guide explains the mechanics and the difference between a HECM and a proprietary reverse mortgage.
Who qualifies for a HECM reverse mortgage?
HECM requirements: (1) At least one borrower must be 62 or older; (2) The property must be your primary residence; (3) You must own the home outright or have significant equity; (4) You must not be delinquent on any federal debt; (5) You must complete a HUD-approved counseling session before applying. HUD's HECM page lists all eligibility requirements and the HUD-approved counselor directory.
How much can you borrow with a reverse mortgage?
The amount you can borrow (the "principal limit") depends on three factors: the age of the youngest borrower, the current interest rate, and the lesser of the appraised home value or the FHA lending limit ($1,209,750 for 2027). Generally, older borrowers at lower rates can access a higher percentage of equity. At age 72 with today's rates, the principal limit factor is approximately 45–55% of home value. The HUD HECM calculator tool estimates your maximum draw based on age and home value.
What are the payout options for a reverse mortgage?
HECM borrowers choose from five payout options: (1) Lump sum (fixed-rate only); (2) Monthly tenure payments (as long as you live in the home); (3) Monthly term payments (for a fixed number of years); (4) Line of credit (grows over time — unused credit increases at the loan rate); (5) Any combination of the above. The line of credit is often the most financially efficient option because the unused portion grows at the same rate as the loan, effectively locking in a future borrowing capacity. CFPB's comparison of reverse mortgage payout types includes a detailed breakdown of each option.
What are the costs of a reverse mortgage?
Reverse mortgages are among the most expensive home loans. Typical costs: upfront MIP of 2% of the home value (HUD-mandated), origination fee of up to $6,000, third-party closing costs ($1,000–$2,500), and ongoing annual MIP of 0.5% of the loan balance. Proprietary (jumbo) reverse mortgages have no MIP but typically higher rates. Total upfront costs on a $400,000 home can exceed $16,000 — most are financed into the loan balance. CFPB's reverse mortgage cost breakdown itemizes every fee category.
When does a reverse mortgage become due?
The loan becomes due and payable when: the last surviving borrower sells the home, moves out for more than 12 consecutive months (including assisted living), dies, fails to maintain the home, fails to pay property taxes or homeowners insurance, or defaults on the loan terms. Heirs typically have 6 months to repay (or up to 12 months with extensions). They can repay the loan balance and keep the home, sell the home and keep any surplus, or sign a deed in lieu of foreclosure if the balance exceeds the home value — the FHA insurance covers the shortfall. HUD's HECM guidance covers all triggering events and heir options.
For standard home purchases, use the US mortgage calculator or compare options with the home equity glossary.