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HECM guide

How a reverse mortgage really works — the mechanics behind the number.

A reverse mortgage is one of the most powerful and misunderstood financial tools available to homeowners over 62. The industry has historically obscured the calculations behind lead-generation forms. This page explains the complete mechanics so you can evaluate whether a HECM makes sense for your situation before ever speaking with a lender.

The three inputs that determine your proceeds

Your estimated HECM proceeds are controlled by exactly three variables:

• Your home's Maximum Claim Amount (MCA). This is the lower of your home's appraised value or the FHA national lending limit ($1,149,825 for 2024–2025). If your home is worth $600,000, the MCA is $600,000. If it's worth $2,000,000, the MCA is still capped at $1,149,825.
• Your age (youngest borrower). HUD publishes the Principal Limit Factor (PLF) — the percentage of the MCA you can borrow — in tables indexed by age and expected interest rate. Older borrowers receive a higher PLF because the loan balance grows for fewer years.
• The expected interest rate. A lower expected rate produces a higher PLF (more proceeds). This calculator uses a moderate rate of ~5.5%. Your actual PLF may be higher or lower depending on prevailing rates at the time you apply.

How the Principal Limit Factor (PLF) works

The PLF is the core multiplier in HECM lending. At a 5.5% expected rate, approximate PLF values look like this:

From the gross proceeds, closing costs and any existing mortgage balance are subtracted to arrive at the net amount you actually receive.

Closing costs: what comes out before you see a dollar

HECM closing costs are substantial and are deducted from your gross principal limit before you receive any funds. The three main costs are:

• Upfront Mortgage Insurance Premium (MIP): 2% of MCA. On a $500,000 MCA, this is $10,000. The MIP is paid to FHA and funds the non-recourse guarantee that protects both borrowers and heirs from owing more than the home is worth.
• Origination fee: Up to $6,000. The FHA formula is the greater of $2,500 or (2% of the first $200,000 + 1% of the remainder), capped at $6,000. This is the lender's compensation.
• Third-party closing costs: ~$3,500–$5,500. Appraisal ($500–$800), title search and insurance, attorney fees, recording fees, and flood certification. These vary by state and property type.

In addition to upfront costs, there is an annual MIP of 0.5% of the outstanding loan balance, added monthly to what you owe — not a cash cost, but it reduces your remaining equity over time.

What happens when the homeowner passes away

The HECM loan becomes due and payable when the last borrower dies, sells the home, or permanently moves out. Heirs are given a minimum of 6 months to settle the loan, with two possible extensions of 3 months each (18 months total), subject to active engagement with the servicer.

The non-recourse protection is the key safeguard for heirs: if the outstanding loan balance exceeds the home's value when sold, the FHA's insurance fund absorbs the shortfall. Heirs are never personally liable for a HECM deficiency — they can surrender the keys and deed with no further obligation.

If the home is worth more than the loan balance, heirs receive the difference after the loan is repaid. The equity is not lost — it is simply reduced by the accumulated loan balance (principal + interest + MIP).

Why you must still pay property taxes and insurance

This is the most important and most commonly misunderstood obligation of a reverse mortgage. A HECM eliminates your monthly mortgage payment — but it does not eliminate your responsibility to pay:

• Property taxes
• Homeowners insurance
• HOA or condo fees (if applicable)
• Routine maintenance to preserve the home's condition

Failure to pay property taxes is the leading cause of HECM default and foreclosure. When a borrower becomes delinquent on taxes, HUD classifies the loan as in default and the servicer must begin foreclosure proceedings. If you are concerned about affording these ongoing costs, discuss a Life Expectancy Set-Aside (LESA) with your counselor — a portion of your loan proceeds is set aside and used automatically to pay taxes and insurance on your behalf.

The line of credit: the most powerful payout option

While lump sums and monthly payments get the most attention, the HECM line of credit is widely considered the most financially powerful option for those who don't need immediate cash. Here's why:

• The unused credit grows. Any unused portion of the line of credit compounds at the same rate as your loan balance. At 5.5%, a $100,000 unused line of credit grows to ~$173,000 over 10 years — providing a substantially larger financial cushion than when it was opened.
• It cannot be cancelled or reduced. Unlike a HELOC (which the bank can freeze if property values decline), a HECM line of credit is irrevocable as long as you meet your loan obligations.
• It serves as a longevity hedge. The line can be used to delay Social Security benefits (by providing income while you wait until 70), replace portfolio withdrawals during market downturns (sequence-of- returns risk mitigation), or fund long-term care costs.

Required counseling: what to expect

Federal law requires every HECM applicant to complete a session with an independent HUD-approved housing counselor before any application can be processed. This is not optional. The session:

• Lasts approximately 60–90 minutes, typically by phone or in person
• Covers all loan terms, costs, payment options, and obligations
• Discusses alternatives (HELOC, downsizing, assistance programs)
• Results in a certificate that you provide to your lender
• Costs $125–$200; may be waived for low-income borrowers

To find a HUD-approved counselor, call the HUD Housing Counseling Line at (800) 569-4287 or visit the HUD website. Counselors are explicitly prohibited from being affiliated with your lender.

Is a reverse mortgage right for you?

A HECM is most appropriate when:

• You plan to remain in the home long-term (at least 5–10 years)
• You need to eliminate a monthly mortgage payment to improve cash flow
• You want a growing line of credit as a financial safety net
• Leaving maximum equity to heirs is not a primary goal
• You can reliably afford ongoing taxes, insurance, and maintenance

It is generally not appropriate if you have health issues that may require moving to assisted living within 5 years, if you plan to leave the home to heirs with minimal debt, or if the closing costs are not offset by the financial benefit over your expected time in the home.