Interest on a HECM is calculated on the outstanding balance at the note rate in your loan documents. Annual MIP of 0.50% of that balance is added as well (Mortgagee Letter 2017-12). You are not billed for a required monthly interest check. Accrual still increases what will be due later. Jay Zayer, a Certified Reverse Mortgage Professional serving California and Arizona, separates that note-rate math from the expected rate that only set the original principal limit.
A fixed-rate HECM locks the note rate and is usually closed-end. An adjustable HECM uses an index plus margin, with periodic and lifetime caps in the note.
Note rate, expected rate, and why mixing them misprices the loan
Expected rate is a program rate used at origination to pick a HUD factor (24 CFR 206.3). It currently sits in the mid-to-upper 6% range. The note rate is the coupon that actually accrues after closing. On a monthly ARM, that coupon can move. On a fixed-rate HECM, it does not.
Margin is a lender choice within HUD’s allowed band. Two adjustable HECMs can share an index and still accrue differently if margins differ.
Initial MIP of 2.00% of maximum claim amount is paid at closing, typically financed. It is not the 0.50% annual MIP that keeps accruing.
What gets added besides interest
Servicing fees, if charged as an allowable HUD fee in the documents, can accrue. Line-of-credit draws increase the balance on the day they fund. Tenure payments increase it as they are made. Unused credit does not accrue as a balance you owe. It is capacity, described on line-of-credit growth.
24 CFR 206.21 addresses interest rates on HECMs. The note controls compounding frequency. Read that page of the closing packet.
How to keep accrual from surprising heirs
Request an annual statement. Model a higher note rate, not only today’s teaser. Remember that FHA insurance and the non-recourse feature cap what the house, not the kids’ other assets, must cover at the end in the usual case.
Estimate proceeds and costs before you pick ARM versus fixed. For the event when the accrued balance is actually collected, see when you repay.
How does a month of accrual actually get added?
Interest is charged on the outstanding principal balance, which includes prior draws, financed closing costs, and amounts already accrued. 24 CFR 206.21 lets HECMs use a fixed rate or an adjustable rate tied to an approved index plus a margin. The note states the compounding period. Monthly compounding is common on adjustable HECMs. That is why a statement can show a larger balance even when you took no new draw.
Annual MIP of 0.50% of the outstanding balance (Mortgagee Letter 2017-12) is a separate add-on. It is not optional. It is not the 2.00% initial MIP paid at closing. Once annual MIP is added, later interest can accrue on that larger balance. Unused line capacity is not part of the balance you owe. Only funded amounts and permitted accruals are.
Walk through the arithmetic without treating any coupon as a quote you can shop today. Start with a $200,000 outstanding balance. One month of interest at a 6.000% note rate is $200,000 × 0.06 ÷ 12 = $1,000. One month of annual MIP at 0.50% is $200,000 × 0.005 ÷ 12 ≈ $83. The next month’s base is about $201,083 if nothing else funded. That illustration uses round numbers so the mechanism is visible. Your note rate, index, and caps control the live file. This page does not carry a Reg Z payment table, so it will not publish a current APR or a monthly payment as if it were an offer.
Expected rate remains a different number. 24 CFR 206.3 defines expected average mortgage interest rate as the lender margin plus the weekly average yield on 10-year CMT (or an additional SOFR index the Secretary approves), rounded to the nearest one-eighth of one percent. That figure selected the original principal-limit factor. It does not reset each month as the coupon.
What can go wrong if the family only watches the unused line?
Adult children sometimes track unused credit and ignore the balance. Those are opposite ledgers. Growth on unused credit is capacity. Accrual on the funded balance is debt. Confusing them produces a false story that “the loan is shrinking because the line grew.”
This product does not help a household that needs the balance to stay frozen while they live in the house rent-free and also draw every month. Draws plus interest plus annual MIP move the number up. Voluntary prepayments are allowed and they do reduce future accrual. HUD does not require those prepayments as a coupon.
A second fact pattern: a 77-year-old in Yuma on a monthly ARM, with a child who only looks at last year’s statement. If the index has moved, the coupon has moved inside the note’s caps. Request a current payoff, not a memory of closing day. Heirs who inherit a due-and-payable HECM under 24 CFR 206.27(c) need that payoff, not a guess.
Fixed-rate HECMs lock the note rate and usually take a closed-end lump. They still accrue. They still add annual MIP. The only thing they stop is index movement. See fixed versus adjustable if the open question is product shape rather than the accrual formula.