How does a reverse mortgage work?

Before the application: counseling and the menu of options

The first lender you contact must describe every option the FHA insures, from the fixed-rate loan with a single payout to the adjustable loan with monthly payments or a credit line, and hand you a list of HUD-approved counselors. You, any spouse who will not sign the loan and any other owner on title then sit through a counseling session. The counselor gives you a certificate, and the lender cannot close without a copy of it. The counseling page covers what the session includes and what it may cost.

Underwriting: the appraisal, your finances and the rate

An FHA appraiser values the home. The lender takes the lesser of that value and the $1,249,125 national limit for 2026; that figure is the maximum claim amount. It also runs a financial assessment: your credit, your record of paying property taxes and insurance, and whether your income covers your bills. If it doubts that you will keep the taxes and insurance current, it can require a set-aside carved out of the loan to pay them, the life expectancy set-aside.

The amount is then read in HUD's factor table at the age of the youngest borrower and at the expected rate, the 10-year Treasury rate plus the lender's margin. With your agreement, the lender can lock that expected rate for up to 120 days from the day the FHA case number is assigned, and it may not charge for the lock. A lock protects the amount from a jump in Treasury rates between application and closing.

Closing day: what the loan pays before you see a dollar

At closing the HECM pays its own costs and clears any mortgage on the home, because it must be the first lien. For the 72-year-old in our example, those mandatory obligations come to $51,600, which is 42 % of the principal limit. HUD then caps what can go out in the first year at 60 % of the principal limit, here $74,496. Subtract the obligations and $22,896 is left for the borrower in year one.

The fees alone, $11,600 here, are taken from the loan rather than paid in cash, so they start accruing interest on day one. The cost page lists the third-party charges that come on top.

Drawing the money

An adjustable HECM can pay out as a credit line, as fixed monthly payments for life or for a chosen number of months, or as a mix of a credit line and monthly payments. A fixed-rate HECM pays one lump sum at closing and nothing after. Monthly payments arrive on the first business day of each month; a draw on the credit line must reach you within five business days of your written request. On an adjustable loan you can switch plans later as long as money remains.

The balance after closing

No payment is due while the loan is in good standing. Interest is added to the balance every month, and so is the annual mortgage insurance of 0.5 %. At today's note rate of 5.99 %, the balance and the unused part of the credit line both grow by 6.49 % a year. The table follows our borrower who draws nothing beyond the closing costs and the payoff.

The credit line grows at the same pace as the debt, which is why a line left untouched for years can end up larger than at closing. That growth is room to borrow, not money paid to you. The loan balance page shows what a lump sum turns into over time.

Pros and cons, counted in this borrower's dollars

On the plus side, the loan turns home equity into cash with no monthly repayment for as long as the borrower lives there: $22,896 can be drawn in the first year and $49,664 more after month 12, on top of the $40,000 mortgage it pays off, which also ends that monthly bill. The debt is non-recourse under 24 CFR part 206: neither the borrower nor the heirs can be asked for more than the home is worth, and heirs who keep the house pay at most 95 % of its appraised value.

On the minus side, the entry price is high and the debt compounds. Upfront mortgage insurance and the origination fee alone take $11,600, 9 % of the principal limit, before any title or appraisal bill. Without any further draw, the balance goes from $51,600 at closing to $98,571 after ten years and $188,298 after twenty, and every dollar of it comes out of the sale price later. Taxes, insurance and upkeep stay due, and cash kept in the bank past the month it is drawn counts as a resource for Supplemental Security Income, as the taxes and benefits page explains.

What keeps the loan in good standing

You keep the title and the duties of an owner. Property taxes, homeowners insurance, flood insurance where the home is in a flood zone, condo or HOA dues and repairs remain yours. The home must stay the principal residence of at least one borrower, and once a year the servicer asks you to certify that it does. You may not enroll in a property tax deferral program or let a new lien take priority over the HECM. Unpaid taxes or insurance can make the loan due while the borrower is still alive and living there.

When the loan comes due, and who pays what

The balance becomes due when the last borrower dies and no surviving borrower lives in the home, or when the borrower transfers title. With HUD's approval, the lender can also call it due when no borrower lives there any more, after more than 12 consecutive months away for illness, or when taxes, insurance or another obligation go unmet. A spouse who never signed the loan but was named as an eligible non-borrowing spouse can stay in the home after the borrower dies, though no more money is paid out; the non-borrowing spouse page explains the conditions.

Once the loan is due, the servicer gives the estate or the heirs 30 days to choose: repay the balance, sell the home, hand over a deed in lieu of foreclosure, or fix the problem that made the loan due. Heirs who want to keep the home can settle the loan for the lesser of the balance and 95 % of the appraised value. No one owes the difference when the debt exceeds the home: the borrower has no personal liability, and the lender can collect only through the sale of the property. Any gap is paid by the FHA insurance that the mortgage insurance premiums fund. The heirs page has the numbers.