How a Reverse Mortgage Works: HECM Rules, Costs and Risks in 2026

A HECM is a reverse mortgage insured by the Federal Housing Administration and made by an FHA-approved lender; it is the only reverse mortgage insured by the federal government (HUD). The insurance does two jobs. It guarantees the borrower that promised advances will be paid even if the lender fails, and it guarantees the lender that it will be made whole when the loan balance ends up larger than the house is worth. You pay for both through the mortgage insurance premiums described below.

The loan is non-recourse. You and your heirs have no personal liability: the lender can collect only from the home, and it cannot get a deficiency judgment if the balance exceeds the sale price (24 CFR 206.27). That is the feature that makes the rest of the arithmetic safe to think about. However long you live and whatever happens to house prices, the debt never reaches your other assets.

You qualify if the youngest borrower is at least 62 at closing, the home is your principal residence, you have enough equity to pay off any existing mortgage from the loan, and you pass a financial assessment and counseling (24 CFR 206.33; CFPB). There is no fixed equity percentage; there is only the practical test that the HECM must be large enough to retire every lien on the house.

The financial assessment is where affluent borrowers occasionally stumble for reasons that have nothing to do with wealth: a tax lien from an old dispute, a gap in homeowner's insurance, a late property tax payment. If the lender concludes that your income and credit do not show you can meet property charges, it can require a life expectancy set-aside (LESA), a portion of the loan reserved to pay taxes and insurance for you (24 CFR 206.205). A set-aside is not a denial, but it reduces what you can draw.

A share of the home's value that rises with age and falls as interest rates rise. HUD multiplies the maximum claim amount, which is the lesser of the appraised value, the sale price (for a purchase) or the 2026 limit of $1,249,125, by a principal limit factor that depends on the age of the youngest borrower or eligible non-borrowing spouse and the expected interest rate (HUD; Mortgagee Letter 2025-22). The expected rate is the 10-year Treasury rate (or an approved SOFR index) plus the lender's margin, so a lender with a lower margin lends you more.

Read the table this way: at 62 with a 6% expected rate, you can borrow 35.7% of the home's value up to $1,249,125; at 85, 54.9%. On a $900,000 house at 70, the 6% factor of 41.5% produces a principal limit of $373,500. Upfront costs financed into the loan come out of that figure. On a home worth more than the limit, only $1,249,125 counts, so the principal limit tops out around a third to two-thirds of that amount depending on age and rates.

Adjustable-rate HECMs also limit what you can take in the first year: the greater of 60% of the principal limit, or your mandatory obligations (costs, liens paid off) plus 10% (Mortgagee Letter 2014-21). The rest becomes available after 12 months. The rule exists to stop borrowers draining the equity at closing, and it rarely matters to someone who wants a reserve.

More to open than almost any other home loan, and the ongoing cost compounds. The FHA charges an upfront mortgage insurance premium of 2% of the maximum claim amount and an annual premium of 0.5% of the outstanding balance (Mortgagee Letter 2017-12). The lender's origination fee is capped at the greater of $2,500 or 2% of the first $200,000 of value plus 1% of the rest, with a ceiling of $6,000 (24 CFR 206.31). On top come third-party closing costs, a counseling fee, interest, and sometimes a monthly servicing fee (CFPB).

Two features of this cost structure matter to the decision. First, most of it is fixed and front-loaded: the 2% premium is charged on the home's value, not on what you borrow, so opening a HECM and drawing little is expensive per dollar used, and a HECM you close after two years is almost always a bad trade. Second, the ongoing cost applies only to money you owe. If you never draw, you pay interest and annual premium only on the financed closing costs. Shop the margin and origination fee: they are the only negotiable pieces, and the margin also sets how much you can borrow.

Five ways, set by regulation: equal monthly payments for life (tenure), equal monthly payments for a set number of months (term), a line of credit, a combination of monthly payments and a line (modified tenure or term), or a single lump sum (24 CFR 206.19). The lump sum is the only option available with a fixed interest rate. Every other option uses an adjustable rate.

The unused line grows every month at the loan's interest rate plus the 0.5% annual premium, whatever happens to the value of the house. By regulation, the principal limit increases each month by one-twelfth of the current note rate plus one-twelfth of the annual insurance rate (24 CFR 206.3). What you owe grows at the same rate, so the difference between the two, your available credit, grows at that rate too.

In Margaret's example below, a line of $345,000 at 70 becomes about $659,703 at 80 and $912,249 at 85, assuming a 6.0% average note rate. At 85 that is roughly the full value of her home. If house prices stall, the line can exceed what the house will sell for, and the non-recourse guarantee means the FHA, not her estate, absorbs the difference. This is the property that makes a HECM line more than an expensive HELOC.

The loan becomes due when the last borrower dies and no eligible non-borrowing spouse lives in the home, when the home is sold or stops being a borrower's principal residence, when a borrower is away for more than 12 consecutive months because of illness, or when the borrower fails to pay property charges or meet another obligation (24 CFR 206.27; CFPB). A move to assisted living or a nursing home is the event families most often fail to plan for.

After the servicer's notice, the borrower or estate has 30 days to pay the balance, sell the home, or hand it to the lender with a deed in lieu of foreclosure. The lender may approve 90-day extensions when the family is actively selling or refinancing (HUD), and CFPB notes that extensions of up to six months may be possible (CFPB). Property taxes and insurance remain the estate's responsibility until title transfers.

If the home is worth more than the balance, the heirs sell or refinance, repay the loan and keep the rest. If it is worth less, the 95% rule applies: the loan is satisfied by a sale for at least 95% of the current appraised value, and HUD treats any post-death transfer as a sale for this purpose (HUD; 24 CFR 206.125). An heir who wants to keep an underwater home should ask the servicer in writing how that rule applies before making an offer.

A spouse who is too young to be a borrower can still stay in the home after the borrower dies, if he or she qualifies as an eligible non-borrowing spouse. The conditions are strict: the spouse must have been married to the borrower at closing and stayed married for the borrower's lifetime, must be named as an eligible non-borrowing spouse in the loan documents, and must occupy the home as a principal residence (24 CFR 206.55). The surviving spouse must also send the servicer a certification within 30 days of the death (HUD).

The protection is a deferral of repayment, not a continuation of the loan. No further money can be drawn after the borrower dies, so a line of credit the couple was counting on stops. Because the younger spouse's age sets the principal limit, adding a 58-year-old spouse also means a smaller loan. A spouse married after closing gets no protection. For couples where both are 62 or older, the simpler answer is to put both on the loan.

Almost always, unpaid property taxes or insurance. You must pay property taxes, hazard and flood insurance, HOA dues and keep the home in good repair; a failure to do so is a default (24 CFR 206.205). No monthly mortgage payment does not mean no monthly housing cost. A set-aside can pay taxes and insurance for you, and borrowers who fear a lapse in their late 80s can choose one voluntarily.

The second risk is occupancy. Spending winters with a daughter in Florida is fine; spending most of the year there is not, because the home must remain your principal residence. The servicer must ask every borrower once a year to certify that the home is still a principal residence (24 CFR 206.211). Answer that letter promptly, and name an alternate contact who will hear from the servicer if you cannot.

A HECM for Purchase lets you buy a new principal residence with a reverse mortgage and a cash down payment, then live there with no monthly mortgage payment (HUD). You pay the difference between the HECM proceeds and the purchase price plus closing costs from your own funds, typically from the sale of the old house. The maximum claim amount is the lesser of the price, the appraisal and $1,249,125.

For a couple of 72 selling a large house to buy a single-level home near their children, the effect is to buy the new home with roughly half cash and half reverse mortgage, keeping the rest of the sale proceeds invested. The same upfront costs apply, so it makes sense only if you plan to stay. Our guide to downsizing in retirement covers the tax and cost side of the sale.

Then a HECM counts only the first $1,249,125 of value, and a proprietary, or jumbo, reverse mortgage may lend more. Proprietary loans are made by private lenders, are not FHA-insured and may carry higher interest rates (FTC). With no FHA premium, upfront costs can be lower on a large home, but the protections that come with a HECM, such as a growing line, the non-borrowing spouse deferral and the 95% rule, exist only if the contract says so.

If you are comparing, ask each lender in writing: is the loan non-recourse; is the line of credit guaranteed and does it grow; what happens to a younger spouse; what triggers repayment; and what are the rate, margin and all fees. Treat a verbal “yes” as a no.

Reverse mortgage money is not taxable income. The IRS treats it as a loan advance, so it does not raise adjusted gross income (IRS Publication 936). For this reader that has three uses: a draw does not make more of your Social Security taxable, does not push you into a higher bracket, and does not count toward the income that sets Medicare IRMAA surcharges two years later.

The interest is generally not deductible. Publication 936 says interest accrued on a reverse mortgage is generally treated as home equity debt interest and is not deductible. Nothing is paid until the loan is repaid anyway, and the exception is narrow: interest on the portion used to buy, build or substantially improve the home, such as a HECM for Purchase, may be deductible when it is actually paid, subject to the usual mortgage interest limits. Ask a tax adviser before counting on it.

Social Security and Medicare are unaffected, because neither is means-tested (FTC). Need-based programs are different. For Supplemental Security Income, loan proceeds are not income, but cash you have not spent by the first day of the following month counts as a resource (SSA POMS SI 01120.220). Medicaid for people 65 and older generally follows SSI methods, with some states applying stricter rules (Medicaid.gov). Anyone who may apply for Medicaid long-term care should draw only what they will spend within the month; our long-term care planning guidecovers Medicaid's home-equity limit and look-back rules.

A reverse mortgage is sometimes sold as a way to delay Social Security to 70. The CFPB studied that strategy and found the loan costs can exceed the extra lifetime benefit for many borrowers and leave much less equity for later needs (CFPB). If you want to delay, bridge from the portfolio first; our guide on when to claim Social Security shows the math.

Margaret is 70, widowed and lives alone in a paid-off house appraised at $900,000. She has $1.6 million in an IRA and a taxable account and $3,400 a month from Social Security. Her spending is covered. What worries her is a bad market in her late 70s and paying for care at home in her 80s without selling stocks at a low. She is comparing a HECM line of credit with a home equity line of credit as a standby reserve. She is hypothetical, and the rates and closing costs below are assumptions.

If she never draws. Her balance is only the $28,500 of financed costs, compounding at an assumed 6.5% (a 6.0% note rate plus the 0.5% premium). It reaches about $54,497 at 80, $75,360 at 85 and $104,209 at 90. That is the full cost of the insurance-like reserve, repaid from the house when she dies or moves. Meanwhile the unused line grows to about $659,703 at 80 and $912,249 at 85.

If she draws in a bad year. Suppose stocks fall 30% when she is 75 and she draws $150,000 for two years of spending instead of selling. Her balance becomes $189,410, then about $362,187 at 85 and $500,838 at 90 if she never repays. Once the portfolio recovers she can repay any part at any time without penalty (24 CFR 206.209), and on an adjustable-rate HECM what she repays becomes available to draw again. Our retirement withdrawal calculator shows how much a sale at the bottom would have cost her plan.

The HELOC alternative. A $250,000 HELOC costs little or nothing to open, and she pays interest only on what she draws, monthly, from her income. But the lender can freeze or reduce the line if the home's value declines significantly or it believes her finances have materially changed (Regulation Z, 12 CFR 1026.40(f)(3)(vi)), and a typical draw period ends after 10 years, at 80 in her case, after which the balance must be repaid and no new draws are allowed.

Her decision. If the reserve is for the next five years, the HELOC wins on cost. If it is for her 80s, when a care need is likeliest and a HELOC may be gone, the HECM line is the only credit she can be sure will exist. Margaret opens the HECM line, names her son as the contact for the servicer, keeps a year of spending in cash as her first layer (see our emergency fund guide), and treats the HECM as the second.

Four, and for many readers of this site one of them is better. A reverse mortgage is the right tool only when you plan to stay in the home for a long time and value credit you cannot lose over cost.

If you still have a forward mortgage, compare paying it down with our mortgage payoff calculator before using a reverse mortgage to retire it. And if the question is really which accounts to spend first, our guide to retirement withdrawal order is the place to start.

• •Leaving a younger spouse off the loan without naming them. An unnamed spouse, or one married after closing, has no right to stay once the borrower dies.
• •Taking the fixed-rate lump sum for a reserve. The fixed-rate HECM pays one lump sum and has no line to grow; interest runs on all of it from day one.
• •Opening a HECM and moving within a few years. The 2% premium is charged on the home's value. Spread over two years it is a very expensive loan.
• •Letting taxes or insurance lapse. It is the most common path to foreclosure, and entirely avoidable with autopay or a set-aside.
• •Ignoring the 12-month rule. A long stay in assisted living ends the loan. Decide in advance whether the house will be sold or kept.
• •Drawing large sums you do not need. Idle cash from the loan costs interest and can count as a resource for SSI or Medicaid the next month.
• •Buying an annuity or other product with the proceeds under pressure. The FTC warns about cross-selling (FTC); our investment scam red flags apply.
• •Not telling the heirs. They have 30 days after the notice to act. A letter in the estate file with the servicer's name and the 95% rule saves weeks; see estate planning basics.

1. 1Write down the job the money must do (income, a reserve, a purchase, paying off a mortgage) and for how many years. If the answer is under five years, price a HELOC first.
2. 2Check the two costs that do not go away: property taxes plus insurance for the next 20 years, and repairs the house will need.
3. 3Meet a HUD-approved HECM counselor, with your spouse, before applying. Find one on HUD's roster or call (800) 569-4287 (HUD). Counseling is required and the certificate is needed for the application.
4. 4Get Loan Estimates from at least three lenders on the same day. Compare the margin (which sets both rate and borrowing amount), origination fee and third-party costs.
5. 5Choose adjustable-rate with a line of credit if the purpose is a reserve; choose fixed only for a one-time lump sum.
6. 6If a spouse is under 62, confirm in writing that he or she is named as an eligible non-borrowing spouse in the loan documents.
7. 7Gather what the financial assessment needs: tax returns, account statements, and proof that taxes and insurance are current.
8. 8At closing, remember you have at least three business days to cancel for any reason (FTC).
9. 9After closing: autopay property taxes and insurance, answer every servicer letter, and file a one-page note for your executor with the servicer's contact and the 30-day rule.