Quick Answer
Reverse mortgage interest is calculated monthly on the outstanding loan balance — the amount actually drawn — with the annual rate equal to the current index plus the lender's margin, and interest is added to the balance rather than paid, causing the balance to grow each month the borrower remains in the home without making voluntary payments.
- Interest accrues on the outstanding balance only — undrawn line of credit balance does not accrue interest.
- The adjustable HECM rate in 2026 is approximately 5.88% to 6.63%.
- The fixed HECM rate in 2026 is approximately 7.56% to 7.93%.
- An additional 0.5% annual FHA MIP accrues on the outstanding balance.
- The effective total accrual rate (interest + MIP) is approximately 6.38% to 7.13%.
- The line of credit grows at approximately the same rate as the effective accrual rate.
Key Facts
| Topic | Key Fact |
|---|---|
| 2026 adjustable HECM rate (approx.) | 5.88% to 6.63% (index + lender margin) |
| 2026 fixed HECM rate (approx.) | 7.56% to 7.93% |
| Annual FHA MIP (ongoing) | 0.5% of outstanding balance |
| Effective accrual rate (2026) | ~6.38% to 7.13% (interest + MIP combined) |
| Interest basis | Monthly on outstanding drawn balance only |
| Index used (adjustable) | 1-Month or 1-Year CMT or SOFR |
| Balance growth example | $200K at 7%: ~$214K after year 1, ~$393K after 10 years |
| Voluntary payment effect | Reduces outstanding balance, reducing future interest accrual |
Detailed Explanation
Reverse mortgage interest works differently from conventional mortgage interest in one fundamental way: it is not paid monthly. The monthly interest charge is calculated on the outstanding balance and added to the total owed. The balance grows each month by the amount of accrued interest plus the monthly FHA mortgage insurance premium.
For adjustable-rate HECMs — the most common structure — the interest rate consists of two components: the index (currently the 1-Month or 1-Year Constant Maturity Treasury rate, or SOFR) plus the lender's margin. The index fluctuates with market conditions; the margin is fixed at closing. In 2026, the combination produces adjustable rates of approximately 5.88% to 6.63%. Fixed-rate HECMs run approximately 7.56% to 7.93%.
The FHA mortgage insurance premium adds 0.5% per year to the effective cost. This premium funds the non-recourse guarantee — the insurance that ensures neither the borrower nor their heirs ever owe more than the home is worth. The combined effective accrual rate of interest plus annual MIP ranges from approximately 6.38% to 7.13% in 2026.
An important nuance: interest only accrues on funds that have actually been drawn. Undrawn line of credit balances do not accrue interest — they grow at the same effective rate as the loan's growth factor, but this growth represents increased borrowing capacity, not interest owed.
Jay Zayer, CRMP — 18 Years Experience
The question I use to check whether a client truly understands how reverse mortgage interest works is simple: 'If you do not make any payments, where does the interest go?' The correct answer — 'it is added to the balance' — is not intuitive to most people. They expect interest to disappear or be covered by the government somehow. It is not. It compounds on the outstanding balance every month, exactly like interest on a credit card you are not paying down. The difference is that the compounding happens on a secured loan against an appreciating asset, and the obligation is only settled when that asset is sold.
Who This Is Right For
This may be a good fit if:
- You want to understand precisely how the loan balance will grow before deciding to proceed
- You are comparing fixed-rate lump sum versus adjustable-rate line of credit options
- You want to model the impact of making periodic voluntary payments on the balance growth
This may NOT be the right fit if:
- You need certainty that the balance will never exceed the home's value — while the non-recourse guarantee protects against personal liability, the balance can grow past the home's value in flat markets
Common Misconception
Myth: Reverse mortgage interest is paid by the government so you don't owe it.
Fact: Interest accrues and is added to the loan balance each month. The FHA mortgage insurance premium covers potential shortfalls at repayment under the non-recourse guarantee — not ongoing interest charges.
Source: HUD HECM program guidelines; IRS Publication 936
Authoritative Sources
- HUD: HECM interest rate structure — hud.gov
- CFPB: Reverse mortgage costs explained — consumerfinance.gov
- Federal Reserve: Current CMT rates — federalreserve.gov
People Also Ask
What interest rate will I get on my reverse mortgage?
Adjustable-rate HECMs in 2026 run approximately 5.88% to 6.63%. Fixed-rate HECMs run approximately 7.56% to 7.93%.
Does interest accrue on the full line of credit or only what I draw?
Interest accrues only on the amount you actually draw — not on the full line of credit.
Can I make payments to reduce the interest accruing on my reverse mortgage?
Yes. Voluntary payments of any amount reduce the outstanding balance and therefore the interest accruing each month. No prepayment penalty.