If you’ve heard the phrase “reverse mortgage” and pictured something confusing or risky, you’re not alone — it’s one of the most misunderstood products in personal finance. The mechanics, though, are fairly simple once you separate what’s actually happening from the marketing noise. This guide walks through what a reverse mortgage is, how the loan balance behaves over time, and the FHA rules that govern the HECM program almost every reverse mortgage in the US falls under.
Run your own numbers in the Reverse Mortgage Calculator once you’ve read through the mechanics below — it’s the fastest way to see how your specific home value, age, and draw plan play out year by year.
The core idea: borrowing against equity without a monthly payment
A normal “forward” mortgage works like this: you borrow a lump sum up front, then pay it down every month until the balance hits zero. A reverse mortgage flips that. Instead of paying the lender, the lender pays you — as a lump sum at closing, a line of credit you draw from as needed, ongoing monthly payments, or some mix of the three. There’s no required monthly payment to the lender. Instead, the amount you owe grows over time as interest and fees are added to the balance.
The loan isn’t due right away. It becomes payable when the last borrower (or eligible surviving spouse) sells the home, moves out permanently — including a stay of more than 12 consecutive months in a care facility — or passes away. At that point the loan is typically settled by selling the home; anything left over after paying off the balance goes to the borrower or their heirs.
HECM: the FHA-insured version behind almost every reverse mortgage
Nearly all reverse mortgages originated in the US today are HECMs — Home Equity Conversion Mortgages. Congress created the program in 1988 and HUD (the Department of Housing and Urban Development) regulates and insures it through the FHA. That insurance is what makes two of the product’s most important features possible:
- Non-recourse. If the loan balance ever grows larger than what the home sells for, FHA insurance — not the borrower or their heirs — absorbs the difference. You will never owe more than the home is worth at payoff.
- Standardized costs. Every HECM borrower pays the same mortgage insurance premium structure regardless of credit score or lender: 2% of the loan’s Maximum Claim Amount upfront, plus 0.5% per year on the outstanding balance.
A small number of “proprietary” or “jumbo” reverse mortgages also exist, aimed at homes worth more than the FHA limit. These are offered directly by private lenders without FHA insurance, so their cost structure and protections vary by lender — this guide, and the calculator above, focus on the standard HECM.
How the loan balance actually grows
This is the part that trips people up, so it’s worth walking through mechanically. Every year, two things happen to the balance:
- Any new draws are added. A lump sum is added once, at closing. A line-of-credit draw is added whenever you take money out.
- Interest and mortgage insurance compound on the whole balance. Your loan’s interest rate plus the 0.5% annual mortgage insurance premium are both charged on the current balance — including any interest and insurance already added in prior years. That’s compounding, the same mechanic that grows a savings account, just working against you instead of for you.
Because nothing is ever paid down, the balance only ever grows. The question that actually determines whether equity holds up over time is whether your home’s appreciation outpaces that growth. If your home is appreciating at, say, 4% a year and your loan is compounding at 7.5% (interest) + 0.5% (MIP) = 8%, the loan is growing faster than the home — equity will shrink over time, potentially to zero. If appreciation runs ahead of the loan’s growth rate, equity can hold steady or even increase.
See this play out with your own numbers in the Reverse Mortgage Calculator — it produces a year-by-year table of loan balance vs. remaining equity so you can see exactly where the lines cross, if they do at all.
Eligibility and upfront requirements
To qualify for a HECM, you need to meet several FHA rules:
- Age 62+. The youngest borrower, or an eligible non-borrowing spouse, must be at least 62 at closing.
- Primary residence. The home has to be where you live most of the year — a single-family home, a 2-4 unit property with one unit owner-occupied, a HUD-approved condo, or an FHA-eligible manufactured home.
- HUD counseling. Before you can even apply, you must complete an independent counseling session with a HUD-approved counseling agency, so you understand the loan before committing to it.
- Financial assessment. The lender checks that you can realistically keep up with property taxes, homeowners insurance, and maintenance — falling behind on these after closing is one of the few ways a HECM can go into default.
The amount you can actually borrow is also capped: FHA will only insure a HECM up to that year’s Maximum Claim Amount, which HUD sets annually. For 2026, that cap is $1,249,125 — 150% of Freddie Mac’s national conforming loan limit of $832,750 — regardless of how much your home is actually worth above that figure. Within that cap, the exact amount you can borrow (the “principal limit”) depends on your age, the loan’s expected interest rate, and current interest rates — a HUD-published factor table your lender applies, not a flat percentage of home value.
Weighing whether the trade-offs are worth it for your situation? See the companion guide, Reverse Mortgage Pros and Cons, for a side-by-side breakdown before you talk to a lender or counselor.