How does a reverse mortgage work?

How does a reverse mortgage work? If you own your home and are 62 or older, the loan pays you from its value. You do not make any monthly payments to the lender. Your balance increases as time passes, while the home's sale repays the loan. For a HECM in 2026, no more than $1,249,125 of the property's value counts.

In the US, nearly every reverse mortgage is a HECM, which stands for Home Equity Conversion Mortgage. Insurance comes from the FHA, the Federal Housing Administration, which sits inside HUD, the US housing department. Each step and number below comes straight from the HECM program's requirements.

What happens, step by step

1. Counseling. Before you apply, you talk to a counselor whom HUD has approved. In that meeting, you review what it costs, what your options are and other ways to get money.
2. Applying for the loan. The lender looks at your income, your credit and how you have handled paying property taxes. The financial assessment is what this check is called.
3. The home appraisal. Your home's value is set by an appraiser approved by the FHA. That value is what the loan is based on, and the yearly cap is the limit.
4. The closing. Your signature goes on the loan papers. Any mortgage you still have gets paid off by the HECM before anything else.
5. Your right to cancel. For a short time after signing, you can change your mind. If you cancel, any money you paid must come back to you from the lender within 20 days, under the CFPB's cancelling rules. The federal consumer finance agency is the CFPB.
6. Receiving your money. You choose monthly payments, a lump sum, a credit line, or a mix of them.
7. Repaying it. As long as you stay in the home and follow the loan terms, no payment is due. When the last borrower moves out, sells the home or dies, the loan must be repaid.

• The home's value stays at $450,000
• Loan balance, growing 7.23% a year

How much a HECM lends you

The full value of your home is not available to borrow. HUD posts a table of factors. At any given age and interest rate, the factor shows how much of the value of your home you can borrow. The lender does the multiplying: that share times your home's value, or times the yearly cap when your home is worth more. Before fees, that result is the highest amount you can borrow, called the principal limit.

The rate used in this reverse mortgage example is the calculator's standard rate. The borrower, age 70, owns a $450,000 home with no mortgage:

The government charges the mortgage insurance. If the loan ever grows beyond what the home sells for, that insurance pays the lender, so you and your family do not end up owing the gap.

At 62, the principal limit for that same home comes to $147,600. At 80, the principal limit is $207,450. Borrowers at higher ages receive more, since the loan is expected to last fewer years. Every age and rate appears in the factor table.

How you take the money

There are four ways to get the money from a HECM:

• One lump sum. The whole amount arrives at closing. If the HECM carries a fixed rate, this is the only choice available.
• A credit line. You take money as you need it, and the part of it you have not used grows over time.
• Payments every month for the whole time you remain in the home. This is what lenders call tenure. In the example above, the monthly payment comes to about $1,050.
• Monthly payouts that last a set number of years. In that example, the monthly payment is $3,072 for 5 years, or $1,217 for 20 years.

When a reverse mortgage calculator gives you a monthly figure, it is the same $155,200, spread out in parts. During the first year, rules cap how much you may take. The cap equals 60% of the principal limit, and more if you need it to cover an old mortgage and closing costs. Usually you can switch your payment plan later for about $20, according to the FTC, the Federal Trade Commission. See the credit line guide for how unused credit grows.

Why your balance grows instead of shrinking

With a standard mortgage, each payment reduces what you owe. A reverse mortgage runs in the opposite direction, which people call reverse mortgage amortization. Interest plus a 0.5% yearly insurance charge is added to your balance every month, so the balance keeps rising.

Over the years, the chart places the loan balance beside the home's value. The interest rate in this example is 6.73%. With the 0.5% insurance charge added in, the balance grows about 7.23% each year. Money you leave unused in a line of credit grows at that same pace. The longer the loan lasts, the less value in the home is left in your hands. Your equity is the part of the value you still own.

Payments you still make while you live there

You keep the home, and your name remains on the title, which is the legal record of who owns it. For as long as you live there, you must:

• make your property tax payments
• keep homeowners insurance, and flood insurance too if it is required
• keep your home in good repair
• live there as your main home

Miss one of these, and the lender can ask you to repay the full loan. Poor health that keeps you away from the home for longer than 12 months can lead to the same result, DC's banking regulator adds. If money looks tight for you, the lender may hold back some of the loan to cover your taxes and insurance.

How do you pay off a reverse mortgage?

Most HECMs get paid off when the home is sold. What you owe comes out of the sale money, and the rest goes to you or to those who inherit from you.

• You are allowed to pay early. You may pay some of it or all of it whenever you want, and what you owe goes down with each payment.
• Your heirs have the option to keep the home. What is owed is paid, unless 95% of the home's appraised value comes to less, in which case they pay that.
• The home may be sold by your heirs. When the home sells for less than the balance, FHA insurance covers the difference. DC's regulator confirms that heirs owe no more than 95 percent of the appraised home value.
• Refinancing is possible. A regular mortgage or a new HECM can pay off the old loan. Read about reverse mortgage refinance.

Your family faces deadlines after a death, and they are covered in the heirs guide.

Questions people ask

1. Who owns the house in a reverse mortgage?

   Ownership stays with you, and the title still lists your name. Just like any other mortgage lender, the lender holds a lien on the house, which is a legal claim, until the loan is repaid. The sale of the home is what usually brings that about.

2. How does a reverse mortgage work if your house is paid off?

   If no mortgage must be cleared, the full amount remaining after fees belongs to you for any use. In that example, a paid-off $450,000 home owned by a 70-year-old leaves $155,200 available.

3. How much does a reverse mortgage pay?

   Usually the amount is well under half of the home's starting value. HUD's latest 12 months of data show that half of all HECMs allowed sums above $194,172 before fees, while the other half allowed sums below it. The home value at the midpoint was $440,000.

4. Can you lose your home with a reverse mortgage?

   That is possible. Leaving the home, skipping tax or insurance payments, or letting the place go into poor condition are all grounds for the lender to ask that the loan be repaid. The lender may use foreclosure to take the home if you do not repay.

5. What is a reverse mortgage example?

   Someone aged 70 who owns a $450,000 home with no mortgage may borrow as much as $173,700 at the standard rate. Once $18,500 in fees come out, $155,200 remains. Put your own numbers into the calculator.