How Does a Reverse Mortgage Work? Cash Flow, Accrual, and When It Comes Due

A reverse mortgage reverses the cash-flow direction of a traditional home loan. On a forward mortgage, the borrower pays the lender every month and the loan balance falls. On a reverse mortgage, the lender pays the borrower (or extends a credit line the borrower can draw on), and the loan balance rises over time. No monthly principal-and-interest payment is required. The loan comes due when a defined maturity event happens; the most common case is the last borrower dying or permanently moving out of the home (Consumer Financial Protection Bureau, Reverse Mortgages: What You Should Know, 2024).

Last reviewed 2026-05-20

How does a reverse mortgage reverse the cash flow?

A traditional 30-year mortgage moves money from the borrower to the lender each month and reduces the loan balance toward zero. A reverse mortgage (specifically the federal Home Equity Conversion Mortgage, or HECM, which is the standard product) moves money in the other direction: from the lender to the borrower, or into a credit line the borrower can draw on. The loan balance climbs each month as interest and insurance accrue on top of whatever has been drawn. The borrower keeps title to the home and remains responsible for property taxes, homeowners insurance, and reasonable maintenance (HUD Single Family Housing Policy Handbook 4000.1, Section II.B).

How does the borrower receive the money?

A HECM borrower picks a payout shape at closing. The four shapes (HUD Handbook 4000.1, Section II.B.10) are:

| Payout | What it does | |---|---| | Lump sum | A single fixed-rate disbursement at closing | | Line of credit | A revolving credit line that grows on the unused portion at the loan's note rate plus the 0.5% annual MIP | | Tenure | A fixed monthly payment for as long as the borrower lives in the home | | Term | A fixed monthly payment for a chosen number of years |

Combinations are permitted: a partial line of credit plus a small monthly tenure payment is a common pattern. The amount available is set by the borrower's principal limit, which is the home's appraised value (capped at the FHA HECM lending limit of $1,249,125 for 2026 case numbers, per HUD Mortgagee Letter 2025-22) multiplied by a principal limit factor, or PLF. The PLF is a percentage from the HUD PLF table indexed to the youngest borrower's age and the expected rate at closing. Older borrowers and lower expected rates produce higher PLFs (HUD ML 2017-12 established the current PLF tables and a 3.0% expected-rate floor).

For more on the HECM-specific LOC mechanic, see the line-of-credit guide. For the eligibility floor and full requirements, see the requirements guide.

What accrues on the balance each month?

Three things accrue on a HECM, all monthly, all on top of whatever the borrower has drawn:

1. Interest. The loan's note rate (fixed on lump-sum HECMs, adjustable on every other payout shape) applied to the current balance.
2. Mortgage insurance premium (MIP). A 0.5% annual rate, charged monthly. FHA MIP funds the federal guarantee that makes the loan non-recourse and that protects the borrower if the lender fails.
3. Servicing fees, if any. A fixed monthly fee set in the loan documents; many current HECMs charge $0.

Nothing comes out of pocket. All three components are added to the loan balance each month. The drawn balance compounds: each month's interest and MIP are calculated on the prior month's already-grown balance.

A worked example. Suppose a 70-year-old borrower with a $500,000 home opens a HECM and takes the entire net principal limit (roughly $189,500 after upfront costs) as a lump sum at a 7.0% fixed note rate plus the 0.5% MIP, a combined accrual rate of 7.5%. At month 12, the balance is roughly $204,200. At year 5, roughly $274,300. At year 10, roughly $397,500. If home values had risen 3% annually over those 10 years, the home would be worth roughly $672,000 and the borrower's remaining equity would be roughly $274,500 (the home's value minus the loan balance). The numbers move with rates, draws, and home-price changes; an amortization view shows the month-by-month trajectory for any inputs.

When does a reverse mortgage come due?

A HECM matures on the occurrence of a single triggering event. Per HUD Handbook 4000.1, Section II.B.9, and 24 CFR §206.27, the maturity events are:

• The last surviving borrower (or eligible non-borrowing spouse) dies.
• The home stops being the primary residence (typically defined as 12 consecutive months of non-occupancy).
• The borrower fails to pay property taxes or keep homeowners insurance current.
• The borrower fails to maintain the home in reasonable repair.
• The home is sold.

On any one of these, the lender calls the loan due and payable. The borrower or estate then has time to satisfy the balance: generally six months, with two additional 90-day HUD-approved extensions available. Payoff happens by selling the home, refinancing into a forward loan, paying off from other funds, or signing the home over with a deed-in-lieu of foreclosure. The mechanics of payoff are covered in how do you pay back a reverse mortgage.

The federal non-recourse protection caps what the borrower or estate ever owes. At a third-party sale, the maximum owed is 95% of the home's then-appraised value. If the home is worth less than the loan balance at maturity, FHA MIP covers the gap and the estate's other assets are not pursued (HUD Handbook 4000.1, Section II.B.9; 24 CFR §206.125).

Why is counseling required before any of this?

Every HECM borrower must complete a session with a HUD-approved counselor before the lender can take an application. The session is independent of the lender, lasts about 60 to 90 minutes, and walks through the loan's mechanics, costs, and alternatives. Jumbo programs often require the same step under their own rules. Details and how to find a counselor are in the counseling guide.

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