HomeBridge · Pillar Guide · 14 min read · Updated June 2026

What is a Reverse Mortgage and How Does It Work?

A reverse mortgage is a federally regulated loan that lets homeowners 62 and older convert part of their home equity into cash — without selling the house and without monthly mortgage payments. The most common type, the Home Equity Conversion Mortgage (HECM), is insured by the Federal Housing Administration (FHA) and accounts for roughly 95% of all reverse mortgages originated in the United States. This guide explains exactly how a HECM works in 2026 — who qualifies, how much you can borrow, how the loan is repaid, and the real trade-offs to understand before you apply.

What a reverse mortgage actually is

A reverse mortgage flips the direction of a traditional mortgage. With a forward mortgage, you borrow a lump sum to buy a home and pay the lender back monthly over 15 or 30 years — your equity grows as your balance shrinks. With a reverse mortgage, you've already built equity, and the lender pays you — either as a lump sum, monthly payments, a line of credit, or a combination — and your loan balance grows over time instead of shrinking. You don't make monthly principal or interest payments. You stay on the deed. You still own your home.

The HECM was created by Congress in 1987 and is administered by the U.S. Department of Housing and Urban Development (HUD). It exists to help older Americans tap home equity without forcing them to sell or take on a monthly payment they can't afford on a fixed income. Because it is FHA-insured, every HECM carries federal protections that don't exist in any other lending product — including a guarantee that you (or your heirs) will never owe more than the home is worth.

How a reverse mortgage works — step by step

Here's what actually happens, from first inquiry to closing:

1. You confirm basic eligibility. You're 62 or older, you live in the home as your primary residence, and the home is a single-family home, FHA-approved condo, qualifying manufactured home, or 2-4 unit property where you occupy one unit.
2. You complete HUD-approved counseling. Federal law requires a one-on-one counseling session (in person or by phone) with an independent HUD-approved counselor before a lender can take your application. The session typically costs $125-$200 and exists to make sure you understand the loan and have considered alternatives. You'll receive a certificate; the lender cannot proceed without it.
3. You apply with an FHA-approved lender. The application looks similar to a traditional mortgage application. The lender will pull credit and verify income — not to qualify you the way a forward mortgage does, but to confirm you can keep paying property taxes and homeowners insurance (more on this below).
4. The home is appraised. An FHA-approved appraiser determines the home's value. This appraised value, your age, and current interest rates together determine your principal limit — the maximum you can borrow.
5. Closing. At closing you choose your payout option (lump sum, monthly, line of credit, or combination). Closing costs are typically rolled into the loan, so out-of-pocket costs at closing are minimal.
6. The 3-day rescission period. Federal law gives you three business days after closing to cancel the loan with no penalty. After that, funds are disbursed per your chosen plan.
7. You live in the home as long as you want. No monthly mortgage payment. You continue to own the home, pay property taxes and homeowners insurance, and maintain the property. The loan balance grows over time as interest accrues on what you've borrowed.
8. The loan is repaid when a "maturity event" occurs — you sell the home, move out permanently, or pass away. At that point the loan is repaid from the home's sale proceeds. If anything is left over, it goes to you or your heirs. If the home sells for less than the loan balance, FHA insurance covers the gap — never you, never your heirs.

Who qualifies for a HECM in 2026

HECM eligibility has four main requirements:

Age. Every borrower on the loan must be at least 62 years old. If you're married and your spouse is younger, they can be listed as a non-borrowing spouse with specific protections (see "Federal protections" below) — but the principal limit is calculated based on the youngest spouse's age, even if only one of you is on the loan.

Primary residence. The home must be your primary residence — where you live the majority of the year. Vacation homes, second homes, and investment properties don't qualify.

Property type. Eligible property types include single-family homes, 2-4 unit properties (you occupy one unit), FHA-approved condominiums, and qualifying manufactured homes (post-June 1976, on a permanent foundation, on land you own).

Financial assessment. Since 2015, FHA requires lenders to perform a Financial Assessment to confirm you have the ability and willingness to pay ongoing property charges — property taxes, homeowners insurance, HOA fees, and basic upkeep. This is not a credit-score gate the way a forward mortgage is, but if your assessment reveals a risk of default, the lender may require a portion of your proceeds to be set aside in a Life Expectancy Set-Aside (LESA) to pay those charges automatically.

Note: there is no income or credit-score minimum the way there is with a conventional mortgage. The HECM is specifically designed for retirees on fixed incomes. The Financial Assessment is about ongoing-cost capacity, not loan repayment.

How much you can borrow

The amount you can borrow — the principal limit — depends on three factors:

1. The age of the youngest borrower (or non-borrowing spouse). Older borrowers can access a higher percentage of their equity, because actuarially the loan is expected to be outstanding for less time.
2. The home's appraised value — up to the FHA HECM lending limit, which for 2026 is $1,249,125. If your home is worth more than this, the lending limit is the cap for HECM purposes. Some lenders offer non-FHA jumbo reverse mortgages that can access value above the cap, with different terms.
3. The expected interest rate at the time of application. Lower rates allow a higher principal limit; higher rates reduce it.

Of the total principal limit, you can typically draw up to 60% in the first 12 months (the "initial disbursement limit"), with the remainder available in year two and beyond. This rule is designed to discourage borrowers from taking everything as a lump sum and depleting equity too quickly.

The five payout options

One of the most powerful features of a HECM is flexibility in how you receive funds:

1. Single lump sum (fixed rate only). All available proceeds are paid at closing as one disbursement. This is the only option that requires a fixed interest rate. Best for paying off a large existing mortgage at closing — but typically the least efficient long-term because interest accrues immediately on the full balance.
2. Term payments. Equal monthly payments for a set number of years you choose. The total is calculated so you'll receive your full principal limit over that term. Useful for filling a known income gap (e.g., until Social Security or a pension kicks in).
3. Tenure payments. Equal monthly payments for as long as at least one borrower lives in the home as a primary residence. Acts as a guaranteed lifetime income stream from your home equity.
4. Line of credit. Funds sit in a line of credit you draw from as needed. Crucially, the unused portion grows over time at the same rate as the loan's interest rate plus the FHA mortgage insurance premium. A line of credit opened at age 62 with low utilization can become substantially larger by age 80. Many financial planners view this as the most powerful HECM option.
5. Modified combinations. You can combine a line of credit with term or tenure payments to get both a steady monthly stream and reserve funds for unexpected expenses.

You can also change your disbursement plan after closing for a small fee — you're not locked into the original choice.

Costs, interest, and fees

HECM costs include both upfront costs (usually rolled into the loan, not paid out of pocket) and ongoing costs that accrue over the life of the loan.

Upfront costs typically include:

• Origination fee — capped by FHA at 2% of the first $200,000 of home value plus 1% above that, with a floor of $2,500 and a maximum of $6,000.
• Upfront FHA mortgage insurance premium (MIP) — 2% of the home's appraised value (or the FHA lending limit, whichever is less). This is what funds the FHA insurance that guarantees your non-recourse protection.
• Third-party closing costs — appraisal ($500-$800), title insurance, recording fees, credit report, flood certification. Typically $2,500-$4,500 total.
• HUD counseling fee — $125-$200, paid before application.

Ongoing costs over the life of the loan:

• Interest — accrues on the outstanding balance. HECMs can be fixed or adjustable. Adjustable rates are tied to the 1-Year Constant Maturity Treasury (CMT) or 1-Year SOFR index plus a margin.
• Annual MIP — 0.5% of the outstanding balance per year. Also accrues to the loan balance.
• Servicing fee — historically up to $35/month, though most modern HECMs have eliminated this.

Because you make no monthly payment, all of these costs compound into the loan balance over time. Your balance grows; your equity shrinks (assuming home value stays flat). If home values rise faster than your balance grows, your equity can still increase. If home values fall, the FHA non-recourse protection makes sure you and your heirs never owe more than the home is worth.

When the loan must be repaid

A HECM becomes due and payable when a "maturity event" occurs:

• The last surviving borrower passes away. Heirs typically have 6 months (extendable up to 12 months in 90-day increments with lender approval) to either repay the loan or sell the home.
• The home is sold. The loan is repaid from sale proceeds at closing; any surplus goes to you.
• The home is no longer the primary residence — for example, the borrower moves to assisted living for 12+ consecutive months.
• The borrower fails to maintain the home, pay property taxes, or maintain homeowners insurance. This is the most common cause of HECM default. Lenders are required to attempt to work with borrowers and offer repayment plans before initiating foreclosure.

Heirs have three options when a HECM becomes due:

1. Sell the home and keep the surplus. If the home sells for more than the loan balance, the difference belongs to the estate.
2. Keep the home by paying off the loan. Heirs can refinance into a conventional mortgage or pay cash. Critically, heirs can buy the home for 95% of its current appraised value even if the loan balance is higher — a federal protection that prevents heirs from being forced to overpay.
3. Walk away. If the home is worth less than the loan balance, heirs can sign a deed in lieu of foreclosure and owe nothing. FHA insurance covers the lender's loss.

Federal protections built into every HECM

The HECM is one of the most heavily regulated loan products in the United States. Key consumer protections include:

Non-recourse. You and your heirs will never owe more than the home is worth at the time it's sold. This is the single most important protection — and it's why FHA insurance exists.

Mandatory HUD counseling. No lender can take your application until you've completed an independent HUD-approved counseling session. The counselor's job is to make sure you understand the loan and have considered alternatives — they have no financial stake in whether you proceed.

3-day right of rescission. You have three business days after closing to cancel the loan with no penalty.

Non-borrowing spouse protections. If your spouse is under 62 and not on the loan, they can remain in the home for life after your death — as long as they were properly identified as a non-borrowing spouse at closing and the home remains their primary residence. This was a significant gap closed by HUD regulations in 2014-2015.

Cap on origination fees. FHA strictly caps how much a lender can charge to originate your HECM (see "Costs" above).

Cap on monthly disbursements after default. If you fall behind on property charges, the lender cannot simply foreclose — they must offer a repayment plan and work with you to cure the default.

Independent appraisal. Appraisers must be FHA-approved and independent of the lender. Some HECMs require a second independent appraisal.

Pros and cons in plain English

Where a HECM makes sense:

• You're 62+, have significant home equity, and want to stay in your home long-term.
• You have an existing mortgage you'd like to eliminate to free up monthly cash flow.
• You want a flexible reserve (line of credit) you may not use for years — letting the unused balance grow.
• You need a way to bridge income gaps in retirement without selling the home or downsizing.
• Your heirs are not counting on inheriting the home outright — or you've discussed this and they're supportive.

Where a HECM may not make sense:

• You're planning to move within 5 years. Upfront costs are high and don't pay off if you don't stay.
• You can't afford property taxes, insurance, and basic upkeep even without a mortgage payment.
• Passing the home down to heirs free and clear is the highest priority.
• Your home is your only major asset and you need it to support your spouse who isn't yet 62 — in this case, structure the loan carefully or wait.

Five myths debunked

Myth 1: "The bank takes your house." False. You remain the owner. The bank is a lienholder, like with any mortgage. The home is sold when a maturity event occurs, and proceeds repay the loan — surplus goes to you or your heirs.

Myth 2: "Your heirs are stuck with the debt." False. Because the HECM is non-recourse, your heirs are never personally liable. The most they can lose is the home's resale value applied to the loan balance. If the balance exceeds the home's value, FHA insurance covers the gap — not your heirs.

Myth 3: "You can be kicked out of your home." Mostly false. You can remain in the home as long as it's your primary residence and you keep up with property taxes, insurance, and basic maintenance. Default on those obligations can trigger foreclosure, but lenders are required to offer repayment plans first.

Myth 4: "Reverse mortgages are a scam." The product itself is federally regulated and insured. The reputational damage comes from a small number of bad actors and unsuitable matches — high-pressure cross-selling, unsuitable annuity rollovers, and borrowers who didn't understand the long-term cost. Working with an FHA-approved lender, completing HUD counseling, and using an independent educational resource (like HomeBridge) substantially reduces this risk.

Myth 5: "You can't leave anything to your kids." False — though there will likely be less equity than if you'd never borrowed. If the home appreciates faster than the loan balance grows, heirs can sell the home, pay off the loan, and keep the surplus. They can also buy the home for 95% of appraised value if they want to keep it. The key is to plan and communicate.

How to know if a reverse mortgage is right for you

A HECM is a powerful tool when it fits, and a costly mistake when it doesn't. Here's a simple decision framework:

1. Are you 62+ and planning to stay in your home for at least 5-7 more years? If yes, continue.
2. Do you have at least 50% equity in your home? If yes, continue.
3. Are property taxes, insurance, HOA, and basic upkeep within your monthly budget? If yes, continue.
4. Have you talked with your spouse (if applicable) and your adult children about this decision? If yes, continue.
5. Do you have a specific goal — eliminate a forward mortgage, fund retirement income, create a growing line of credit reserve, or pay for in-home care? If yes, a HECM may be a strong fit.

If you answered yes to all five, your next step is HUD counseling — required before any lender can take an application. From there, compare offers from 2-3 FHA-approved lenders. HomeBridge's pre-qualification form will match you with vetted FHA-approved lenders in your state.

Frequently asked questions

Do I still own my home with a reverse mortgage?

Yes. You remain the owner. Your name stays on the title. The lender holds a lien against the property — exactly like a traditional mortgage — but they are not the owner.

Will I have to make any monthly payments?

You do not make monthly principal and interest payments on a HECM. You are still responsible for property taxes, homeowners insurance, HOA fees (if any), and basic maintenance. If you fall behind on those, the loan can be called due.

What happens if I outlive my reverse mortgage proceeds?

If you've chosen a tenure plan, payments continue for as long as you live in the home — even if total payments exceed your original principal limit. If you took a lump sum or term payments and exhausted them, you simply stop receiving payments, but you can stay in the home as long as you keep up with property charges.

Can I lose my home with a reverse mortgage?

Only if you fail to meet the loan's ongoing obligations — primarily, keeping up with property taxes, insurance, and maintenance, and keeping the home as your primary residence. As long as you do those things, you cannot be forced out.

How does a reverse mortgage affect Social Security or Medicare?

HECM proceeds are loan proceeds, not income, so they do not affect Social Security or Medicare benefits. They can affect needs-based programs like Medicaid or Supplemental Security Income (SSI) if proceeds are held in a bank account beyond the month they're received. Talk to a benefits counselor if you receive Medicaid or SSI.

Is reverse mortgage interest tax-deductible?

Generally, interest is only deductible in the year it is actually paid — which for a HECM typically means the year the loan is repaid (when the home is sold or refinanced). Consult a tax professional for your specific situation.

What's the difference between a HECM and a "jumbo" or "proprietary" reverse mortgage?

A HECM is FHA-insured and capped at the $1,249,125 FHA lending limit for 2026. Jumbo (or "proprietary") reverse mortgages are offered by private lenders without FHA insurance, allowing them to lend against home values above the FHA cap. Jumbo products have different terms, generally less consumer protection than HECMs, and are best suited to homeowners with high-value homes where the FHA cap would significantly restrict proceeds.

Can I get a reverse mortgage to buy a new home?

Yes. This is called HECM for Purchase — you use a HECM to buy a new primary residence, combining the proceeds with a down payment from the sale of your previous home or other funds. This is popular for retirees right-sizing into a more accessible single-story home.