How Reverse Mortgages Work

The principal limit is the home value times a factor that grows with age (a simplified stand-in for HUD's HECM tables — roughly 40% at 62, ~50% at 75, ~60% at 85). Paying off an existing mortgage and upfront costs (2% MIP plus fees) comes out of that limit; the rest is cash available to you.

Worked Example

A $450,000 home with a 65-year-old borrower gives a 40% factor ($180,000 limit). After paying off a $100,000 mortgage and ~$15,000 in upfront costs, about $65,000 is available as cash — and the loan balance grows at the 7.2% interest rate until the home is sold.

Know the Trade-Offs

Reverse mortgages eliminate monthly payments and let you age in place, but the compounding balance erodes the equity your heirs would inherit. Fees are higher than a conventional mortgage, and HUD requires a counseling session before closing. For many retirees the math works; for others, a HELOC or downsizing is cheaper.