How Reverse Mortgages Work: HECM Proceeds, Costs, and Payback

Understand HECM reverse mortgage proceeds, PLF, upfront costs, and repayment rules — with a worked example for a 72-year-old borrower.

Published by Calcatalog Last reviewed: 7 min read Drafted with AI assistance and reviewed by the Calcatalog team
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What a Reverse Mortgage Is

A reverse mortgage is a loan against home equity that does not require monthly principal or interest payments during the borrower’s lifetime in the home. Instead, the loan balance grows over time as interest accrues, and is repaid — together with accumulated interest and fees — when the last borrower sells the home, permanently moves out, or passes away.

The most common form in the United States is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). HECMs are available to homeowners who are 62 years of age or older and have sufficient equity in their primary residence.

A reverse mortgage is not free money — it is a loan against an asset — but it can provide meaningful liquidity for retirees who have equity but limited income.

Who Is Eligible

To qualify for a HECM:

  • Age: All borrowers on title must be at least 62. Non-borrowing spouses may remain in the home under HUD deferral provisions even if they are under 62, but this affects the available proceeds.
  • Primary residence: The property must be the borrower’s principal residence. Investment properties and vacation homes do not qualify.
  • HUD-approved counseling: Federal law requires all HECM applicants to complete counseling from a HUD-approved housing counseling agency before applying.
  • Property types: Single-family homes, 2–4 unit properties (borrower must occupy one unit), FHA-approved condominiums, and manufactured homes meeting HUD requirements.
  • Obligations: The borrower must keep current on property taxes, homeowners insurance, and basic home maintenance. Failure to do so can trigger a due-and-payable default.

How the Proceeds Are Calculated

The amount a borrower can receive depends on three variables:

  1. Effective home value: The lesser of the appraised value and the 2026 FHA HECM lending limit of $1,209,750. Homes worth more than this limit do not receive proportionally larger proceeds; the calculation caps at the limit.

  2. The borrower’s age: Older borrowers receive a higher percentage of the home’s value. This is because older borrowers have a shorter expected time horizon, so the lender recovers the loan balance (with accumulated interest) sooner.

  3. The expected interest rate: Lower rates increase proceeds; higher rates reduce them. The expected rate used by HUD is based on the 10-year Constant Maturity Treasury (CMT) rate plus the lender’s margin.

These three variables are combined into a table value called the Principal Limit Factor (PLF) — the percentage of the effective home value available as a reverse mortgage. HUD publishes PLF tables; the calculator uses an approximation.

The Principal Limit is the maximum amount of equity the borrower can access:

Principal Limit = Effective Home Value × PLF

From that, upfront costs are subtracted to arrive at the Net Available lump sum:

Net Available = Principal Limit − Existing Mortgage − Upfront MIP − Origination Fee − Other Closing Costs

Upfront Costs

Upfront Mortgage Insurance Premium (MIP)

The FHA charges an upfront MIP of 2% of the effective home value regardless of how much equity is accessed. This premium funds the HECM insurance pool, which ensures that borrowers (and their heirs) will never owe more than the home’s sale value — even if the loan balance exceeds it.

Origination Fee

Lenders charge an origination fee under HUD’s formula:

  • 2% of the first $200,000 of the effective home value
  • 1% of any portion above $200,000

The fee is subject to a minimum of $2,500 and a maximum of $6,000.

Other Closing Costs

These vary by lender and state but typically include title insurance, appraisal fee, recording fees, and flood certification. A common range is $2,000–$5,000 in total.

A Worked Example

Consider a 72-year-old borrower with a $300,000 home, no existing mortgage, and an expected interest rate of 4%. Assume $3,000 in other closing costs.

PLF approximation (from the HUD approximation formula):

PLF ≈ 0.500 + (72 − 62) × 0.013 − (4 − 3) × 0.064
    = 0.500 + 0.130 − 0.064
    = 0.566

Principal Limit: $300,000 × 0.566 = $169,800

Upfront MIP: $300,000 × 2% = $6,000

Origination Fee: min($6,000, max($2,500, $200,000 × 2% + $100,000 × 1%)) = min($6,000, max($2,500, $4,000 + $1,000)) = $5,000

Total upfront costs: $6,000 + $5,000 + $3,000 = $14,000

Net Available: $169,800 − $0 − $14,000 = $155,800

This borrower can access approximately $155,800 as an initial lump sum (or as a line of credit or monthly tenure payments after subtracting set-asides).

How the Loan Is Repaid

The reverse mortgage loan balance grows over time as interest accrues and is added to the principal. The loan becomes due and payable when:

  • The last surviving borrower (or eligible non-borrowing spouse) passes away
  • The last surviving borrower permanently moves to another residence or facility
  • The property is sold
  • The borrower fails to maintain property taxes, insurance, or minimum property standards

HECMs are non-recourse loans: the borrower (or their estate) will never owe more than the home’s fair market value at the time of sale. If the loan balance exceeds the sale proceeds, FHA insurance covers the shortfall. If the home sells for more than the loan balance, the heirs receive the difference.

Monthly Payment Options

Rather than taking the proceeds as a lump sum, borrowers can choose:

  • Tenure payments: Fixed monthly payments for as long as the borrower occupies the home as a primary residence
  • Term payments: Fixed monthly payments for a specified number of months
  • Line of credit: Draw against available equity as needed; the unused portion grows over time at the loan interest rate
  • Combination: A partial lump sum plus a smaller line of credit or ongoing monthly payment

The monthly tenure payment is essentially an annuity to age 100 calculated on the net available principal. The worked example borrower ($155,800 available at age 72, 4% rate) would receive approximately $900–$1,000 per month as a tenure payment, though the exact figure depends on the lender’s calculation.

Risks and Limitations

Reverse mortgages are appropriate for some situations and not others. Key risks:

  • Equity erosion: The loan balance grows over time. A borrower who takes a large lump sum at 72 may find that relatively little equity remains for heirs at age 85.
  • Non-borrowing spouse risk: A non-borrowing spouse under 62 remains protected under HUD deferral rules, but this arrangement has specific requirements and the spouse cannot borrow additional funds.
  • Property obligations: Failure to pay taxes, insurance, or maintain the property can result in the loan being called due — a risk for borrowers on fixed incomes.
  • Heirs must act quickly: After the borrower’s death, heirs typically have 30 days to decide whether to repay the loan and keep the home, sell the home, or allow the lender to sell it. This can be difficult when estates are complex or assets are illiquid.
  • Not suitable for short-term residents: If a borrower expects to move within 2–3 years, the upfront costs ($14,000 in the example) may not be recouped.

Proprietary Reverse Mortgages

For homes appraised above the 2026 FHA HECM limit of $1,209,750, private lenders offer proprietary (jumbo) reverse mortgages. These are not FHA-insured and often carry different PLF tables and cost structures. The calculator on this page covers HECMs only.

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Summary

A HECM reverse mortgage lets homeowners 62 and older access home equity without monthly payments. The borrower’s age and the expected interest rate determine the Principal Limit Factor; combined with effective home value, this sets the gross proceeds. Subtracting the 2% upfront MIP, the HUD-formula origination fee, and other closing costs produces the net available amount. For the worked example — 72-year-old borrower, $300,000 home, 4% rate — the net available lump sum is approximately $155,800 on a principal limit of $169,800.

Use the reverse mortgage calculator to estimate your own HECM proceeds.

This guide is educational. Actual HECM proceeds depend on a formal FHA appraisal, the lender’s current PLF table, and underwriting. Consult an FHA-approved lender and a HUD-approved housing counselor before making any decisions.