How a Reverse Mortgage Actually Works, and Who It's Really For

Reverse mortgages have a reputation problem. Half the people who ask me about them have heard “the bank takes your house,” and the other half have seen a commercial that made it sound like a pension nobody told them about. Neither is right.

Ignite Loan Partners does broker reverse mortgages, specifically the FHA-insured kind, through our wholesale lending partners. So I have an interest here, and I’d rather you know that up front. What follows is the version I’d give my own parents: how the loan works, how the amount is calculated, what it costs, what it takes to qualify, and, just as important, when I’d tell someone not to do it.

What a reverse mortgage is

Almost every reverse mortgage written today is a Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA). It’s a loan against your home for homeowners 62 and older that you don’t make monthly payments on. Instead, interest and fees are added to the balance each month, and the loan is repaid when the last borrower sells, moves out, or passes away.

The Consumer Financial Protection Bureau (CFPB) puts the core mechanic in one sentence: “With a reverse mortgage, the amount the homeowner owes goes up, not down, over time” (CFPB, Reverse Mortgages). And in another: “A reverse mortgage is not free money. It is a loan that you, or your heirs, will eventually have to pay back, usually by selling your home” (CFPB, Reverse Mortgages: A Discussion Guide).

You keep the title. You keep living in the house. What you give up is equity, a little more each month, in exchange for cash now and no mortgage payment.

It’s also a smaller program than the advertising suggests. FHA insured 28,149 HECMs in fiscal year 2025 (FHA Annual Report to Congress, FY2025). That’s a rounding error next to the forward mortgage market, which is one reason so few loan officers explain it well.

How much you can borrow: the principal limit

This is the part I want you to actually understand, because it’s where the sales pitch and the reality diverge.

Your maximum loan amount is called the principal limit. Per the CFPB, it “takes into account your age, the interest rate on your loan, and the value of your home. In general, loans with older borrowers, higher-priced homes, and lower interest rates will have higher principal limits” (CFPB Discussion Guide). Three inputs:

1. The age of the youngest borrower (or eligible non-borrowing spouse). Older means more.
2. Your home’s appraised value, capped at the FHA maximum claim amount. For 2026 that cap is $1,249,125 (HUD Mortgagee Letter 2025-22). If your home is worth more than that, the extra value doesn’t count.
3. The “expected rate,” a long-term rate assumption set at application. Higher expected rates shrink the limit.

HUD publishes a table of principal limit factors that turns those inputs into a percentage of home value. One of our wholesale lending partners has a quick calculator built on that table, and at its current expected-rate assumption (about 5.875%) the factors look like this:

Two things to notice. First, at 62 you’re borrowing about a third of the house, not “your equity.” Second, the number climbs steadily with age, which is why a 70-year-old and an 80-year-old with identical homes get very different offers.

A worked example. Say you’re 70, your home appraises at $600,000, and you still owe $150,000 on a conventional mortgage.

• Principal limit: 40.9% × $600,000 = $245,400
• The existing $150,000 mortgage must be paid off at closing, because a HECM has to be the only lien on the house.
• That leaves about $95,400 before closing costs and mortgage insurance, which typically come out of the proceeds too. Net, you’d be looking at something in the neighborhood of $75,000 in usable funds, and your $150,000 mortgage payment is gone.

Same house, no existing mortgage, and the whole $245,400 is available (less costs). Same house at 62, and the gross limit drops to $210,600. At 80, it rises to $289,200.

These are illustrations from a lender’s calculator, not a quote. Your appraisal, the expected rate the day you apply, and your specific costs all move the number.

The first-year limit. One more rule that surprises people: in the first 12 months, you can generally take the greater of 60% of your principal limit or the amount needed to pay off mandatory obligations plus 10% (HUD Mortgagee Letter 2014-21). So in the example above, most of the money beyond the mortgage payoff sits in a line of credit until year two. That’s by design, to slow how fast the balance grows.

How you receive the money

A HECM isn’t just a lump sum. The options, per the CFPB’s discussion guide:

• Lump sum. Available only on a fixed-rate HECM, and you take everything you’re allowed to at closing. Interest starts accruing on all of it immediately.
• Line of credit. You draw what you need, when you need it. The feature most people don’t know about: the unused portion of the line grows over time at the loan’s interest rate plus the 0.5% insurance premium, regardless of what your home does. A line you open at 65 and don’t touch is meaningfully larger at 75.
• Tenure payments. A fixed monthly amount for as long as you live in the home.
• Term payments. A fixed monthly amount for a set number of years.
• Combinations. A line of credit plus monthly payments is common.

Adjustable-rate HECMs offer all of these. Fixed-rate HECMs offer only the lump sum. For most people who aren’t paying off a large mortgage, the line of credit is the version worth understanding first.

What it costs

There is no free version of this. The costs are real, they’re mostly financed into the loan, and they’re why a reverse mortgage is a bad fit if you might move in three years.

• Upfront FHA mortgage insurance: 2% of the maximum claim amount. On a $600,000 home that’s $12,000, charged at closing whether you draw the money or not (HUD Mortgagee Letter 2017-12).
• Annual FHA mortgage insurance: 0.5% of the outstanding balance, added to the loan each year (HUD ML 2017-12). This is what funds the guarantees described below.
• Lender origination fee, capped by regulation at the greater of $2,500 or 2% of the first $200,000 of value plus 1% above that, with a hard ceiling of $6,000 (24 CFR 206.31).
• Third-party closing costs: appraisal, title, escrow, recording, the same items as any mortgage.
• Counseling fee, paid to the HUD-approved counseling agency (some waive it based on income).
• Interest, which accrues monthly on whatever you’ve drawn plus the financed costs, and compounds.

The insurance is the piece people push back on. It’s expensive. It also buys two things you can’t get from a home equity line: the lender can never demand repayment while you live in the home and meet the loan terms, and neither you nor your heirs can owe more than the house is worth. More on that below.

What it takes to qualify

A HECM has fewer income hurdles than a conventional loan, but it isn’t “sign here.” Per HUD (HUD, HECM program page) and the CFPB:

• Age 62 or older. Every borrower on the loan. A younger spouse can be a non-borrowing spouse (see below), but the loan amount will be based on the younger age.
• Primary residence. You have to live there most of the year.
• Eligible property. Single-family homes, 2- to 4-unit properties where you occupy one unit, FHA-approved condos, and manufactured homes that meet FHA standards.
• Enough equity. Any existing mortgage or lien must be paid off at closing, out of the HECM proceeds or your own funds. If your balance is too high relative to the principal limit, the loan doesn’t work. The CFPB is blunt about this: “If you still owe a lot of money on your existing mortgage, you might not have enough equity to pay off your current mortgage with a reverse mortgage, which means you may not be able to get a reverse mortgage.”
• HUD-approved counseling. Mandatory, independent, and done before you apply. You get a certificate; the lender can’t close without it. Find a counselor at (800) 569-4287. My honest advice: treat the session as free advice from someone who isn’t selling anything, and bring your kids or whoever helps with your finances.
• Financial assessment. Since 2015, lenders must verify you can keep up with property taxes, insurance, and upkeep. They look at your income, credit history, and especially your history of paying property charges. If the numbers are tight, the lender will require a Life Expectancy Set-Aside (LESA): a chunk of your proceeds reserved to pay taxes and insurance for you. That lowers what you can spend, but it’s also the thing that keeps borrowers out of default (HUD ML 2014-22, Financial Assessment guide).

What you still owe after closing

“No monthly payment” doesn’t mean “no obligations.” The CFPB’s borrower guide lists three requirements you must keep meeting, and failing any of them can put the loan in default (CFPB, You Have a Reverse Mortgage: Know Your Rights and Responsibilities):

1. The home must stay your principal residence. You’ll certify this every year by mail. Being away more than six months for non-medical reasons, or more than 12 consecutive months in a hospital, rehab, or assisted living facility, with no co-borrower at home, makes the loan due.
2. You must pay property charges on time. Taxes, homeowners insurance, flood insurance if required, HOA dues, and assessments.
3. You must keep the home in good condition.

Most reverse mortgage horror stories trace back to number two. Someone stopped paying property taxes, the loan defaulted, and a foreclosure followed. The 2015 financial assessment rules and the LESA exist precisely to prevent that.

What happens at the end

When the last borrower moves out permanently or passes away, the loan comes due. Here’s how it resolves.

• If the house is worth more than the loan, you or your heirs sell it, repay the balance, and keep the difference. Or heirs refinance and keep the home.
• If the loan is worth more than the house, the HECM is non-recourse. The CFPB: “If your loan balance is more than the value of your home, your heirs won’t have to pay more than 95 percent of the appraised value. The remaining balance of the loan is covered by mortgage insurance” (CFPB). Heirs who want to keep the home pay the lesser of the full balance or 95% of appraised value.
• Timeline. Per HUD, the loan “must be satisfied within 30 days of the date of the borrower’s death,” but the lender “may approve 90-day extensions” while the estate is actively selling or arranging payoff (HUD, Inheriting a Home Secured by an FHA-insured HECM). In practice, families generally get up to six months, sometimes longer with documentation.
• A non-borrowing spouse. For HECMs made on or after August 4, 2014, a spouse who was under 62 at closing (and therefore not on the loan) can stay in the home for life after the borrower dies, as long as they were married at closing, lived there as their principal residence, and keep meeting the loan terms. Two catches: they must be named in the loan documents as an eligible non-borrowing spouse, and, per the CFPB, “an Eligible Non-Borrowing Spouse will not get any money from the reverse mortgage” (CFPB). If there’s an age gap in your marriage, this is the section to slow down on.

When a reverse mortgage makes sense

After enough of these conversations, the good fits look similar:

• You’re house-rich and cash-tight, and you’re staying put. Most of your net worth is in the home, you plan to be there for the long haul, and the goal is to stop worrying about monthly cash flow.
• Eliminating a mortgage payment changes your life. In the example above, the borrower gets $75,000 and drops a $150,000 mortgage and its payment. For a retiree on a fixed income, the payment going away is often the bigger win.
• You want a standby line of credit you can’t lose. A HECM line of credit can’t be frozen or reduced because home values fall or your income changes, and the unused portion grows. Some retirees open one and don’t touch it for years, using it to cover a bad market year or a big medical expense instead of selling investments at the wrong time.
• You want to age in place and pay for help at home. Tenure payments can fund in-home care in a way a lump sum can’t.
• Leaving the house free and clear isn’t the goal. Your heirs are fine, or they’d rather you be comfortable than inherit a paid-off house.

When I’d tell you not to do it

• You might move within a few years. The upfront insurance and costs are front-loaded. Amortized over three years, this is one of the most expensive ways to borrow. Over fifteen, it’s often reasonable.
• You can’t reliably cover taxes, insurance, and upkeep. A reverse mortgage doesn’t fix that, and defaulting on it means losing the house.
• You still owe a lot on the home. If the payoff eats most of the principal limit, you’ve paid a lot in costs to net very little.
• A spouse under 62 would be left without income. The non-borrowing spouse can stay, but the money stops. Sometimes it’s better to wait until both spouses qualify.
• You have a cheaper option. If you have steady income and good credit and you just need $40,000 for a roof, a HELOC or a cash-out refinance will almost always cost less. The HECM’s advantages (no payment, non-recourse, can’t be called) come at a price, and if you don’t need those advantages you shouldn’t pay for them.
• Downsizing would solve it. Selling a $600,000 house and buying a $350,000 one with cash leaves you with more money and no loan. It isn’t always emotionally possible, but it belongs in the comparison.

Reverse mortgage vs. HELOC vs. cash-out refinance

One more thing: the rules may shift

HUD asked the industry and the public for input in late 2025 on how the HECM program should change, including insurance premiums, set-asides, and underwriting (CFS Review, October 2025). As of this writing, nothing has been finalized and there’s no announced timeline. Everything above reflects the rules in effect today. If you’re reading this in 2027, ask us what’s changed.

The bottom line

A reverse mortgage is a legitimate, federally insured tool with a specific job: turning home equity into cash flow for people who plan to stay in their home for a long time. It’s expensive up front, it’s regulated more heavily than almost any other consumer loan, and the required counseling means you’ll get an independent second opinion whether you want one or not. That’s a feature.

If you’re 62 or older and wondering whether it fits, the fastest way to find out is to run your actual numbers: your age, your home’s likely value, and what you owe. We can do that in a few minutes, show you the principal limit and the costs side by side with a HELOC or cash-out option, and tell you honestly which one we’d pick. Then go to counseling and see if they agree.

Sources: CFPB, Reverse Mortgages consumer hub; CFPB, Reverse Mortgages: A Discussion Guide; CFPB, You Have a Reverse Mortgage: Know Your Rights and Responsibilities; CFPB, “What happens if my reverse mortgage loan balance grows larger than the value of my home?”; CFPB, “What happens to my reverse mortgage when I die?” (reviewed January 2, 2025); HUD, FHA Reverse Mortgages for Seniors (HECM); HUD Mortgagee Letter 2025-22, 2026 HECM Limits (December 11, 2025); HUD Mortgagee Letter 2017-12, HECM MIP Rates and Principal Limit Factors (August 29, 2017); HUD Mortgagee Letter 2014-21, HECM Financial Assessment and First 12-Month Disbursement; HUD, HECM Financial Assessment and Property Charge Guide (ML 2014-22); HUD, Inheriting a Home Secured by an FHA-insured HECM (September 2019); 24 CFR Part 206, Home Equity Conversion Mortgage Insurance; FHA Annual Report to Congress on the Mutual Mortgage Insurance Fund, FY2025; CFS Review, “HUD Seeks Input on Reverse Mortgage Programs,” October 2025

About the author: Michael Kerby is the Founder & President at Ignite Loan Partners, NMLS #1163561. Read Michael's bio →

This article is for general education and isn't financial advice or a commitment to lend. Loan programs, terms, and availability depend on your qualifications and are subject to credit approval. Ignite Loan Partners, NMLS #2381991. Equal Housing Opportunity.