Loan Types

Reverse Mortgage (HECM) Basics: How It Works, Costs and Red Flags

A mortgage that pays you? Sort of. Here is a calm, plain-English look at how HECM reverse mortgages work, what they cost and what to watch for.

By Shivam Kaushik · Updated October 31, 2026 · 7 min read

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Quick answers

What it is: A Home Equity Conversion Mortgage (HECM) is the FHA-insured reverse mortgage. It lets homeowners 62 and older turn part of their home equity into cash without making monthly mortgage payments.
Counseling is required: Before you can apply, you must meet with a HUD-approved HECM counselor.
Repayment: The loan generally comes due when the last borrower dies, sells the home, or moves out. The balance grows over time instead of shrinking.
2026 limit: The HECM maximum claim amount is $1,249,125 for 2026, according to HUD.
Not free money: You still pay property taxes, insurance and upkeep, and costs include mortgage insurance of 2% upfront plus 0.5% a year.

A reverse mortgage sounds like a mortgage that went through a mirror. Instead of you paying the bank every month, money flows the other way. That’s roughly right, and it can be a genuinely helpful tool for some older homeowners.

It can also be expensive, confusing, and a favorite topic of high-pressure salespeople. So let’s walk through the basics calmly, with no hype and no scare tactics, just how it actually works.

What a HECM is (and isn’t)

With a regular “forward” mortgage, you borrow a lump sum and pay it down over time. Your balance shrinks and your equity grows.

A reverse mortgage flips that. You borrow against your equity, and you usually make no monthly principal and interest payments. Interest and fees get added to the balance each month, so your loan balance grows and your equity shrinks.

The HECM is the version insured by the Federal Housing Administration (FHA), part of the Department of Housing and Urban Development (HUD). It’s the most common type of reverse mortgage. Other “proprietary” reverse mortgages exist, but they aren’t FHA-insured and follow different rules.

Who can get one

According to HUD, the basic requirements include:

You must be 62 or older.
The home must be your principal residence (where you actually live most of the year).
You must own the home outright or have paid down a considerable amount.
You can’t be delinquent on any federal debt, like unpaid federal taxes.
You need the resources to keep paying property taxes, homeowners insurance and any HOA fees.
You must complete counseling with a HUD-approved HECM counselor.

The counseling requirement

This step is mandatory, and it’s actually useful. A HUD-approved counselor is independent of the lender. Their job is to explain how the loan works, what it costs, your payout options, and alternatives you might want to consider, like downsizing or other assistance programs.

You can find a counselor through HUD’s website or by calling HUD’s housing counseling line at (800) 569-4287. Bring your questions, and consider bringing a trusted family member too.

Myth buster“With a reverse mortgage, the bank owns my house.” No. You keep the title and remain the owner. But you must keep living there as your main home, pay taxes and insurance, and maintain the property. Falling behind on those can put the loan in default.

How you can receive the money

HUD lists several payout choices. With an adjustable-rate HECM, you can choose:

Tenure: monthly payments for as long as at least one borrower lives in the home as a principal residence
Term: monthly payments for a set number of months
Line of credit: draw money when you need it
Modified tenure or modified term: a mix of a line of credit with monthly payments

With a fixed-rate HECM, you get a single lump sum at closing. How much you can get depends on the age of the youngest borrower (or eligible non-borrowing spouse), current interest rates, and the lesser of the home’s appraised value or the HECM limit.

Fun factHUD sets one nationwide HECM limit instead of county-by-county limits. For 2026 the maximum claim amount is $1,249,125, up from $1,209,750 in 2025, per HUD Mortgagee Letter 2025-22.

How it gets repaid

A HECM generally becomes due and payable when the last borrower dies, sells the home, or moves out permanently. It can also come due if you stop meeting the loan terms, such as not paying property taxes or insurance.

When that happens, the loan is usually repaid by selling the house. Heirs can also choose to pay off the loan and keep the home.

A key protection: HECMs are non-recourse loans. You or your estate will generally not owe more than the home is worth when the loan is repaid, even if the balance has grown larger. FHA mortgage insurance covers the gap for the lender.

What it costs

Reverse mortgages are often more expensive than other ways to tap equity. Costs can include:

Initial mortgage insurance premium (MIP): 2%, charged at closing
Annual MIP: 0.5% of the outstanding loan balance each year
Origination fee charged by the lender (capped by FHA rules)
Third-party closing costs like appraisal, title and recording fees (see closing costs explained)
Interest, which compounds on the growing balance

Many of these can be financed into the loan, which lowers your out-of-pocket cost but increases your balance.

Example

Pat, age 70, owns a home appraised at $400,000 with no mortgage. The upfront MIP would be 2% of $400,000, or $8,000.

Say Pat’s loan balance reaches $150,000. At an assumed combined rate of 7.5% a year (interest plus annual MIP, compounding monthly) and no further draws or payments, here’s how the balance could grow:

Years later	Approx. loan balance
Start	$150,000
5 years	$217,994
10 years	$316,810
15 years	$460,418

Illustration only. Real HECM rates and balances vary. Because of the non-recourse feature, Pat’s estate generally wouldn’t owe more than the home’s value when the loan is repaid.

The lesson: time is the big cost driver. That’s why the FTC suggests asking lenders for the Total Annual Loan Cost (TALC) rates, which show projected yearly costs over different time periods.

Non-borrowing spouses: read this twice

If only one spouse is on the loan (often because the other is under 62), the younger spouse is a “non-borrowing spouse.” For HECMs with FHA case numbers assigned on or after August 4, 2014, HUD rules allow an eligible non-borrowing spouse to stay in the home after the borrowing spouse dies, as long as certain conditions are met. Those generally include being married at closing, being named in the loan documents, continuing to live in the home as a principal residence, and keeping up with taxes and insurance.

But a non-borrowing spouse can’t receive any more loan money after the borrower dies. And older loans may have different rules. If this applies to you, ask the counselor to walk through exactly what happens in your situation.

Scams and red flags to avoid

The Federal Trade Commission (FTC) warns about several common traps:

Pressure to hurry. If someone rushes you, walk away.
Pushing other products. You don’t have to buy an annuity, long-term care insurance or investments to get a reverse mortgage.
Contractors pitching a reverse mortgage to pay for repairs, especially after a disaster.
“Free house” or “government grant” claims. A HECM is a loan, with interest and fees.

Most reverse mortgages also give you three business days after closing to cancel for any reason. Do it in writing, and keep copies. Suspected fraud can be reported to the FTC at ReportFraud.ftc.gov, the CFPB, or your state attorney general.

Alternatives worth a look

A reverse mortgage isn’t the only way to use home equity. Depending on your income and goals, you might compare it with a HELOC or home equity loan, a cash-out refinance, or downsizing. Our refinance calculator and mortgage calculator can help you size up the monthly payments on those options.

FAQ

Can I lose my home with a reverse mortgage?

Yes, if you don’t meet the loan terms, such as paying property taxes and insurance, maintaining the home, and living there as your principal residence. That’s why budgeting for those costs matters.

Will my kids inherit debt?

Generally, no. HECMs are non-recourse, so heirs typically won’t owe more than the home’s value. They can sell the home to repay the loan or pay it off to keep the home.

Is reverse mortgage money taxable?

Loan proceeds generally aren’t treated as income by the IRS because they’re borrowed money. Check with a tax professional about your situation, including any effect on benefits.

Can I get a HECM if I still have a mortgage?

Often yes, if you have enough equity. Part of the HECM money is usually used to pay off the existing mortgage first.

What is the 2026 HECM limit?

HUD set the 2026 HECM maximum claim amount at $1,249,125 nationwide.

Sources: U.S. Department of Housing and Urban Development (HECM program and Mortgagee Letter 2025-22), Federal Housing Administration, Federal Trade Commission, Consumer Financial Protection Bureau, IRS. This article is general education, not financial advice. Keys & Coffee is not a lender.

Written by

Shivam Kaushik· IMSHIVA

Founder & Director, QuibbleTech Solutions Pvt Ltd · Editor, Keys & Coffee

Shivam Kaushik is the founder of QuibbleTech Solutions Pvt Ltd and the editor of Keys & Coffee. He is not a licensed loan officer or financial adviser. Every guide here is written in plain English and checked against official sources such as the CFPB, HUD, Fannie Mae, Freddie Mac and the Federal Reserve. For advice on your own loan, talk to a licensed lender.

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Keys & Coffee is an independent education site. We are not a lender or mortgage broker, we do not take loan applications or payments, and nothing here is financial advice. This site is not affiliated with Axia Home Loans, Axia Financial, LLC, or Planet Home Lending. Rates and rules change often — always confirm details with a licensed loan officer and check any lender on the NMLS Consumer Access site.