Reverse Mortgages Explained: How a HECM Turns Home Equity Into Cash

Most mortgages move in one direction: you pay the lender, the balance falls, and one day you own the home outright. A reverse mortgage runs the film backwards. The lender pays you — as a lump sum, a line of credit, or a monthly check — and the balance quietly grows for as long as you live in the house. Nothing comes due until the last borrower moves out or passes away.

For homeowners 62 and older who are equity-rich but income-light, that trade can be genuinely useful. It can also be misunderstood, oversold, and expensive if it's the wrong fit. This guide walks through how the federally insured version — the HECM, or Home Equity Conversion Mortgage — actually works, what it costs, and how to decide whether it belongs in your retirement plan. You can estimate your own numbers in about a minute.

Who qualifies

The HECM rules are set by HUD and FHA, not by individual lenders, so the entry requirements are the same everywhere:

• Age 62 or older. Every borrower on title must qualify, and the numbers are driven by the youngest borrower's age.
• Primary residence. The home must be where you actually live; vacation homes and rentals don't qualify.
• Substantial equity. There's no fixed percentage, but in practice you need roughly half the home's value or more — any existing mortgage is paid off out of the proceeds, so a large balance eats the benefit quickly.
• A counseling session. HUD requires a meeting with an independent, HUD-approved counselor before a lender can even take your application. It typically costs around $125–$200 and exists to make sure you've seen the alternatives.

Lenders also run a financial assessment to confirm you can keep paying property taxes and homeowner's insurance — the two obligations that don't go away. If those numbers look shaky, the lender may set aside part of your proceeds to cover them, the same way escrow works on a forward mortgage.

How much you can get: the principal limit

Everything starts with a number called the principal limit — your home's value (counted only up to the FHA ceiling of $1,249,125 as of 2026) multiplied by a principal limit factor from HUD's tables. The factor answers an actuarial question: how much can be lent today so that the balance, growing at the loan's rate plus insurance, is still likely to be covered by the house decades from now?

Two things drive the factor, and the chart above shows the first:

• Age. A 62-year-old at a 6.5% rate can reach about a third of the home's value; a 90-year-old, well over half. Shorter expected loan life means the lender can safely advance more.
• The expected interest rate. Higher rates mean faster balance growth, so the factor drops. A couple of percentage points can move your available cash by tens of thousands of dollars — worth remembering when rates are volatile.

From the principal limit, the mandatory deductions come out: the upfront FHA insurance premium (2% of the counted home value), the origination fee (capped at $6,000), other closing costs, and — usually the biggest item — the payoff of whatever you still owe on your current mortgage. What's left is yours. On a $400,000 home at age 70 with a $50,000 balance remaining, that works out to roughly $94,500 of usable money. The reverse mortgage calculator shows this whole waterfall line by line for your own inputs.

Three ways to take the money

A lump sum. The only fixed-rate option, and the simplest — but HECM rules cap first-year disbursements at 60% of the principal limit (or your mandatory obligations plus 10%), so you can't drain the whole limit on day one. Best when there's a single large expense: paying off the old mortgage, a roof, medical bills.

A line of credit. The most popular choice, and the one with a genuinely unusual feature: the unused portion of a HECM credit line grows over time at the same rate the loan charges. It isn't interest you earn — it's borrowing capacity that compounds. Opened early and left alone, the line can grow into a substantially larger reserve for later in retirement, which is why some financial planners suggest setting one up years before you expect to need it.

Monthly payments. A tenure plan pays a fixed amount every month for as long as you live in the home — even if you outlive the actuarial tables and the payments exceed the original limit. A term plan pays more per month over a fixed number of years. Tenure payments behave like an annuity funded by your house, without handing money to an insurance company.

You can mix these — say, a small lump sum now plus a growing credit line for later.

What it costs, honestly

Reverse mortgages are more expensive to open than regular ones, and it's better to see that in daylight:

• Upfront FHA insurance: 2% of the counted home value. On a $400,000 house that's $8,000, regardless of how much you actually draw.
• Ongoing insurance: 0.5% per year added to the balance. This premium is what makes the loan non-recourse — the guarantee that nobody ever owes more than the home sells for.
• Origination fee: 2% of the first $200,000 of home value plus 1% above it, floor $2,500, cap $6,000.
• Interest, which compounds on everything drawn, plus the closing costs any mortgage has.

The compounding is the part to sit with. Unlike a forward loan, where amortization grinds the balance down, a HECM balance grows exponentially: money drawn at 70 can double by your mid-80s at current rates. That's not a flaw — it's the price of never making a payment — but it directly reduces what's left for you or your heirs if the home is sold.

The guardrails

Three protections built into the HECM program do real work:

• Non-recourse, by law. If the balance outgrows the home's value, FHA insurance absorbs the difference. Heirs can keep the house by paying the loan balance or 95% of appraised value, whichever is less — or sell it and keep anything above the balance.
• A non-borrowing spouse can stay. Under current HUD rules, an eligible spouse who isn't on the loan can remain in the home after the borrower dies, though payments to them stop.
• The loan only comes due when you leave. Sale, a permanent move (including 12+ months in care), or death — not a market downturn, not a birthday.

The obligations are equally real: stay current on property taxes, insurance and upkeep, or the loan can be called early. Tax and insurance default is the most common way reverse mortgages go wrong.

When it makes sense — and when it doesn't

A reverse mortgage tends to fit when you plan to stay in the home for many years, most of your net worth is in the house, and the goal is steady income or a safety reserve rather than a one-off splurge. It tends not to fit when you may move within a few years (the upfront costs never get amortized), when you're taking it to invest or to cover a spending problem, or when leaving the home itself to heirs is the top priority.

Run the alternatives first: downsizing frees equity without any loan; a home equity loan or HELOC is far cheaper upfront if you can carry a payment; a refinance may lower your existing payment enough to solve the problem. And if you're still weighing what house payments fit your budget in the first place, the mortgage calculator covers the forward direction.

The takeaway

A reverse mortgage is neither a scam nor free money — it's a deliberate trade: you spend part of your home's future value now, at a meaningful upfront cost, in exchange for cash flow and the right to never make a payment while you live there. The older you are and the longer you'll stay, the better the math gets. Before talking to any lender, estimate your principal limit, costs and monthly options with real numbers, then take that printout to your HUD counseling session and make them explain anything that doesn't match.