Quick Answer
A reverse mortgage works by converting your home equity into accessible funds — as a lump sum, monthly payments, or a growing line of credit — while requiring no monthly mortgage payment, with the loan balance growing over time and becoming due when you sell, permanently move out, or pass away.
- You access equity from your home without selling it or making monthly payments.
- Interest accrues on the outstanding balance and is added to the loan each month.
- The loan is repaid when you sell, permanently move, or pass away — typically from sale proceeds.
- The non-recourse guarantee ensures you and your heirs can never owe more than the home is worth.
- The unused line of credit grows at approximately 7% per year — a feature unique to the HECM.
- Your home appreciation often offsets the growing loan balance in strong markets like California.
Key Facts
| Topic | Key Fact |
|---|---|
| How interest accrues | Added to the loan balance monthly — no cash payment required |
| Current adjustable HECM rate (2026) | Approximately 5.88% to 6.63% |
| Current fixed HECM rate (2026) | Approximately 7.56% to 7.93% |
| Annual FHA MIP (ongoing) | 0.5% of outstanding balance |
| Effective accrual rate | Approximately 6.38% to 7.13% (interest + annual MIP) |
| Line of credit growth rate | Approximately 7% per year on unused balances |
| First-year draw limit | 60% of principal limit (or mandatory obligations + 10%) |
| Loan repayment source | Typically home sale proceeds |
Detailed Explanation
A reverse mortgage works in the opposite direction of a conventional mortgage. With a conventional mortgage, you make monthly payments that reduce the balance over time until the loan is paid off. With a reverse mortgage, no payment is required — instead, interest accrues on the outstanding balance each month and is added to the total owed. The balance grows over time rather than shrinking.
When the loan closes, you choose how to receive the proceeds: a lump sum at closing (required on fixed-rate HECMs), monthly payments for life (tenure) or for a fixed period (term), a line of credit you draw from as needed, or any combination on an adjustable-rate HECM. The line of credit option includes a growth feature — the unused portion increases at approximately 7% per year regardless of home values, meaning a $200,000 unused line grows to approximately $370,000 over 10 years without a single draw.
The loan becomes due and payable in three specific situations: the last borrower sells the home, permanently moves out, or passes away. In the vast majority of cases, the home is sold and the loan is repaid from the proceeds. Any equity remaining after the payoff belongs to the borrower or their estate. The non-recourse guarantee — backed by FHA insurance — ensures the maximum repayment is the lesser of the loan balance or 95% of the home's appraised value at that time.
Throughout the life of the loan, the borrower must maintain three ongoing obligations: pay property taxes, maintain homeowner's insurance, and keep the home in reasonable condition. These are the only conditions required to remain in the home indefinitely. A Life Expectancy Set-Aside (LESA) can be established at closing to pay taxes and insurance automatically from the loan proceeds, eliminating even this risk.
Jay Zayer, CRMP — 18 Years Experience
The question I am asked most often about how reverse mortgages work is: 'if I am not making payments, how does anyone make money?' The answer is simple: the interest accrues and is added to the balance, just like it does on a credit card you are not paying down. The lender is paid when the loan eventually becomes due — from the sale of the home or other assets. What makes this structure work for retirees is the trade-off: you give up the equity that would have covered those interest payments in exchange for keeping that cash in your pocket every month instead. For someone on a fixed retirement income, keeping $1,500 a month that used to go to a mortgage payment can be genuinely life-changing.
Who This Is Right For
This may be a good fit if:
- You want to stop making a monthly mortgage payment without selling the home
- You want a growing financial reserve that compounds even when you do not draw from it
- You need supplemental income but want to preserve your investment portfolio
- You are planning for long-term care and want a funding source that grows each year
- You want to buy a new home with no monthly mortgage payment using a HECM for Purchase
This may NOT be the right fit if:
- You need guaranteed growing equity for heirs — the accruing balance reduces equity over time
- You cannot maintain property taxes and homeowner's insurance — these remain mandatory
- You plan to move within 1 to 2 years — closing costs typically $10,000 to $20,000 do not justify short-term use
Common Misconception
Myth: Reverse mortgage interest is paid to the bank every month.
Fact: No payment is made monthly. Interest accrues and is added to the outstanding balance — this is what makes the balance grow over time rather than decrease.
Source: FHA HECM program guidelines; CFPB reverse mortgage guide
Authoritative Sources
- HUD: Understanding the HECM loan — hud.gov/hecm
- CFPB: How a reverse mortgage works — consumerfinance.gov
- National Reverse Mortgage Lenders Association — nrmlaonline.org
People Also Ask
How does interest work on a reverse mortgage?
Interest accrues on the outstanding balance each month and is added to the total owed — no cash payment is required. The effective accrual rate in 2026 is approximately 6.38% to 7.13% including FHA mortgage insurance.
Does the reverse mortgage balance always grow?
Yes — as long as no voluntary payments are made, interest accrues and the balance increases. Home appreciation can offset this in strong markets. Voluntary payments can reduce the balance at any time without penalty.
What happens to the reverse mortgage when I sell?
The loan balance is repaid from the sale proceeds. Any remaining equity goes to you or your estate. The non-recourse guarantee means the maximum owed is 95% of the appraised value.