How a reverse mortgage actually works

The one-sentence version

A reverse mortgage lets a homeowner aged 62 or older borrow against the equity in their home and defer every payment until they permanently leave it — at which point the home is sold or refinanced and the balance is settled from the proceeds.

That is genuinely the whole mechanism. Everything else is detail about how much, how you receive it, and what obligations remain.

Why it runs backwards

With a normal mortgage, you start with a large balance and pay it down. The debt falls, the equity rises. A reverse mortgage does the opposite: you start at or near zero and the balance climbs as interest and insurance are added each month. The debt rises, the equity falls.

Nobody sends you a bill. That is the trade. You are not avoiding the interest — you are borrowing it too, and settling up at the end.

How much you can borrow

Three things set the number, and only one of them is about your home:

1. The age of the youngest borrower. Older means more. The formula is estimating how long the loan will run before the house is sold, so every year of age raises the percentage of equity you can reach.
2. The expected interest rate. Not your note rate — a separate figure, fixed when your FHA case number is assigned, used solely to project how fast the balance will grow. Higher expected rate, lower proceeds.
3. Your home's value, capped at the FHA lending limit — $1,249,125 for 2026. Value above the cap does not count toward a HECM. It may still be reachable through a proprietary reverse mortgage.

Multiply the capped value by a HUD-published factor for your age and expected rate, and you get the principal limit — the total the loan can ever advance. In today's rate environment that lands somewhere around a third of the home's value at 62, and past half by the mid-eighties.

What comes off the top

The principal limit is not what you pocket. Paid first, from that pool:

• Any existing mortgage or lien. Mandatory — a reverse mortgage must be in first position. For most borrowers this is the largest single deduction, and also the entire point.
• Closing costs, which can be financed rather than paid in cash. Itemised here.

What remains is yours.

The five ways to take the money

The first-year rule

You generally cannot take everything in the first twelve months. HUD caps the first year at 60% of the principal limit — unless your mandatory obligations (an existing mortgage plus closing costs) exceed that, in which case you may take those obligations plus another 10% of the principal limit.

The rule exists because too many borrowers took everything on day one, spent it, and had nothing left for taxes and insurance. The remainder becomes available on the first anniversary.

What you still have to do

A reverse mortgage removes your mortgage payment. It does not remove your obligations as a homeowner, and this is where loans fail:

• Property taxes, paid on time, every year.
• Homeowners insurance, kept continuously in force.
• The home itself, maintained in reasonable repair.
• Living there as your principal residence.
• Any HOA or condo dues that apply.

Miss these and the loan can be declared due and payable, which can end in foreclosure. This is not fine print — it is the single largest cause of reverse mortgage foreclosures. If keeping up with taxes and insurance is already difficult, say so early. HUD's answer is a LESA: a Life Expectancy Set Aside, where part of the proceeds is reserved to pay those bills for you. It reduces the cash you receive and removes the risk entirely, and for the right borrower it is a good deal.

When the loan comes due

A HECM becomes due and payable when:

• The last surviving borrower dies;
• The home stops being the principal residence for twelve consecutive months — a permanent move to care, typically. Hospital stays and rehab do not count;
• The home is sold; or
• The borrower defaults on taxes, insurance or upkeep.

At that point the loan is repaid, almost always by selling the home. If it sells for more than the balance, the surplus goes to you or your heirs. If it sells for less, FHA insurance covers the gap and nobody is pursued for the difference. Heirs who want to keep the house can pay off the balance or 95% of appraised value, whichever is less. The full picture for your family is here.

What it takes to get one

First, the short version of whether it applies to you at all: you need to be 62 or older, living in the home as your principal residence, with enough equity to clear any existing mortgage. The full eligibility rules, including the financial assessment and what quietly disqualifies a property, are here.

1. A conversation. Twenty minutes. Free, no credit pull, and you should expect to be told if this is a bad idea.
2. HUD counseling. Required, independent, roughly $125–$200 and sometimes free. What the session covers.
3. Application and appraisal. An FHA appraisal sets the value; a financial assessment reviews your history with taxes and insurance.
4. Underwriting. Two to four weeks typically.
5. Closing, followed by a three-day right of rescission on most refinances. Then the funds.

Six weeks start to finish is normal. Nothing is binding until you sign, and you can stop at any point — the appraisal fee is generally the only money at risk.