Reverse Mortgage

Quick Definition

A reverse mortgage is a loan available to homeowners aged 62 or older that allows them to convert a portion of their home equity into cash, as a lump sum, monthly payments, or line of credit, without making monthly mortgage payments. The loan balance grows over time as interest accrues. Repayment is required when the last borrower sells the home, permanently moves out, or dies. The most common type is the FHA-insured Home Equity Conversion Mortgage (HECM).

What It Means

A reverse mortgage is essentially the opposite of a traditional mortgage. Instead of making payments to build equity, you receive payments that reduce equity. It allows asset-rich, cash-poor retirees to access their home equity without selling the home or making monthly payments. The loan is repaid from the home's sale proceeds when the homeowner eventually leaves the property.

Reverse mortgages carry significant costs and risks. They are frequently misunderstood and misused. But they can be a legitimate planning tool for the right household in the right circumstances.

HECM: The FHA-Insured Reverse Mortgage

The Home Equity Conversion Mortgage (HECM) is the dominant reverse mortgage product:

The 2026 HECM lending limit of $1,249,125 is a 3.3% increase from $1,209,750 in 2025, marking the 10th straight year of increases. This is the maximum home value used in the loan calculation, regardless of how much your home is actually worth. If your home appraises at $1,500,000, the calculation uses $1,249,125.

How Much Can You Borrow?

The maximum HECM loan amount depends on three factors:

Principal Limit Factor (PLF): The PLF is the percentage of home value available to borrow. It ranges from approximately 36-62% depending on age and rates.

PLF examples at an expected interest rate of 5.875% (based on HUD PLF tables):

Example: 72-year-old borrower, $600,000 home, PLF of approximately 0.435 (at 5.875% expected rate):

• Available to borrow: $600,000 x 43.5% = $261,000
• Less upfront costs (MIP, origination): ~$18,000
• Net available proceeds: ~$243,000

2026 HECM Interest Rates

As of March 2026, HECM interest rates (per SoFi data):

The expected interest rate is the single most impactful factor a borrower can influence through lender selection. A lower expected rate produces a higher PLF, meaning more money for the borrower. The margin varies by lender (typically 1.5% to 3.0%), so shopping among lenders can meaningfully increase your available proceeds.

For adjustable-rate HECMs, the expected rate equals the 10-year benchmark rate plus the lender's margin. For fixed-rate HECMs, the expected rate equals the note rate. Fixed-rate HECMs restrict you to a single lump-sum disbursement at closing.

Distribution Options

The growing line of credit: One of the most powerful HECM features. The unused portion of the line of credit grows at the same rate as the loan interest, regardless of home value changes. A $200,000 HECM credit line at 7% grows to approximately $394,000 in 10 years, even if home value does not increase. This makes early HECM setup (even if not immediately needed) a potentially powerful retirement planning strategy.

HECM Costs

On a $500,000 home, the initial MIP alone is $10,000 (2% of $500,000). Add origination fees and third-party costs, and total upfront costs can reach $18,000-$25,000.

HECM costs are high, often 5-7% of home value upfront. Short-term use is almost never justified. HECMs are most appropriate for long-term use (10+ years).

Reverse Mortgage Risks and Misconceptions

The tax and insurance default risk: The most common reverse mortgage default is failure to pay property taxes or homeowners insurance. HUD reported thousands of foreclosures annually from borrowers who took HECM funds but stopped paying taxes or insurance, technically triggering the due and payable provisions.

When a Reverse Mortgage Makes Sense

Alternatives to Consider

Proprietary (Jumbo) Reverse Mortgages

For homes valued above the $1,249,125 HECM limit, proprietary (or jumbo) reverse mortgages offer higher loan amounts. These are privately insured and not FHA-backed.

• Finance of America's HomeSafe suite offers loans up to $4 million for homeowners 55 and older.
• Longbridge Financial and Fairway Home Mortgage also offer jumbo reverse mortgages up to $4 million.
• No FHA non-recourse guarantee (though some lenders may still offer it).
• Different underwriting and potentially higher or lower costs depending on the lender.
• Most appropriate for owners of high-value homes who need to access more equity than the HECM limit allows.

Key Points to Remember

• Reverse mortgages require no monthly mortgage payments. Loan repaid when you sell, move out, or die.
• The 2026 HECM lending limit is $1,249,125, up 3.3% from 2025. This is the 10th straight year of increases.
• HECM is the FHA-insured standard. Mandatory counseling required before application.
• Only 36-62% of home value is accessible, depending on age and expected interest rate.
• HECM fixed rates run 7.68-7.81% and adjustable rates 5.50-5.75% as of March 2026.
• The unused HECM credit line grows over time, a powerful feature for strategic planning.
• Upfront costs are high (5-7% of home value). Only appropriate for long-term use.
• Must still pay property taxes, insurance, and maintain the home. Failure triggers default.

Common Mistakes to Avoid

• Taking a HECM for short-term needs: With upfront costs of 5-7% of home value, a HECM only makes financial sense if you plan to stay in the home for 10+ years. If you expect to sell within 5 years, a HELOC or home equity loan is almost always cheaper.
• Not shopping lenders for the best margin: The lender's margin directly affects your expected interest rate and PLF. A margin difference of 0.5% can translate to tens of thousands of dollars in available proceeds. Compare at least three lenders.
• Failing to pay property taxes and insurance: This is the most common HECM default trigger. Set aside funds for taxes and insurance before spending HECM proceeds.
• Not considering a non-borrowing spouse: HUD uses the youngest borrower's age for the PLF calculation. If a younger spouse is not on the loan, they risk losing the home if the older borrower dies. Always include both spouses as borrowers if both are 62+.
• Taking a lump sum when a line of credit would work: The lump sum option locks in a higher loan balance immediately. A line of credit grows over time and gives you flexibility to draw only what you need.

Frequently Asked Questions

Q: What happens to my home after I die if I have a reverse mortgage? A: The loan becomes due and payable when the last surviving borrower dies. Heirs have approximately 6-12 months (with extensions) to either repay the loan balance (typically by selling the home) or choose to keep the home by refinancing the HECM into a conventional mortgage. If heirs choose to sell and the home sells for more than the loan balance, they receive the excess equity. If the home sells for less than the loan balance, FHA insurance covers the shortfall. Heirs owe nothing more (non-recourse protection).

Q: Can a reverse mortgage affect Medicaid eligibility? A: HECM proceeds received as a lump sum and not spent in the month received can count as an asset for Medicaid eligibility purposes. HECM proceeds received as monthly payments may be treated as income. Strategic use of proceeds, spending them promptly on allowable items, can preserve Medicaid eligibility, but the rules are complex and vary by state. Consult an elder law attorney before using a reverse mortgage if Medicaid eligibility is a concern.

Q: What is a proprietary reverse mortgage? A: Proprietary (or jumbo) reverse mortgages are private products offered by lenders for homes valued above the HECM limit ($1,249,125). They can provide larger loan amounts for high-value homes, with some lenders offering up to $4 million. They are not FHA-insured, meaning no non-recourse guarantee from FHA (though lenders may still offer it), different underwriting, and potentially higher or lower costs depending on the lender. They are most appropriate for owners of high-value homes who need to access more equity than the HECM limit allows.

Q: How does the HECM lending limit work if my home is worth more than $1,249,125? A: The lending limit is the maximum home value FHA will use when calculating your HECM loan amount. If your home is worth $1,500,000, the calculation uses $1,249,125, not your full value. You still get a HECM, but the equity above the cap is left on the table. For very high-value homes, a proprietary jumbo reverse mortgage can access additional equity.