Reverse mortgages: How they work for homeowners 62 and older

Written by Samantha SheltonNMLS 1647301Updated October 2026

A reverse mortgage lets a homeowner age 62 or older turn home equity into cash without making a monthly mortgage payment. The most common one is the Home Equity Conversion Mortgage (HECM), the only reverse mortgage insured by the federal government, and for FHA case numbers assigned on or after January 1, 2026 it counts home value up to a maximum claim amount of $1,249,125.¹

Retired couple on the porch of their Michigan ranch home, the kind of homeowners reverse mortgages are designed for

What you draw depends on the youngest borrower’s age, the home’s value, and current rates. The balance comes due when you sell, move out permanently, or die, and the loan is non-recourse. Learn who qualifies, what each payout costs, and what your heirs inherit, or compare programs first in our Loan Types & Programs guide.

Key takeaways:

Age 62 and HUD counseling are the gates: Every borrower must be 62 or older, live in the home as a principal residence, hold enough equity to clear any existing mortgage, and finish HUD-approved counseling.
No monthly payment does not mean no obligations: You still owe taxes, insurance, and upkeep, and the loan becomes due and payable as soon as the home stops being a borrower’s principal residence. The 12-consecutive-month allowance applies only to an absence caused by physical or mental illness.
Non-recourse caps the payoff: The balance grows as interest compounds, but if it passes the home’s value, heirs settle at 95% of appraised value and owe nothing more.

What is a reverse mortgage?

A reverse mortgage is a home loan that pays you instead of you paying it, converting part of your equity into cash while you keep the title and stay in the house. It is the mirror image of a regular mortgage: the balance grows as interest and insurance premiums are added, and your equity shrinks. Three products carry the name, and only one is federally insured.

HECM: FHA’s reverse mortgage, governed by HUD rules on age, counseling, costs, and payoff. It’s the version described here and the one most Michigan homeowners are offered. See HUD’s official HECM reverse mortgage program page.
Proprietary reverse mortgages: Private loans, usually aimed at homes worth more than FHA’s maximum claim amount. The lender writes the rules, not HUD.
Single-purpose reverse mortgages: Narrow programs offered in some areas by state or local agencies and nonprofits, where the money can only go toward a purpose the lender names.

That distinction matters: none of the federal protections below applies automatically to a proprietary or single-purpose loan. Because Align is a broker, we can place a HECM through partner lenders and compare it against our other specialty financing options.

Who qualifies for a reverse mortgage?

The threshold is age: every borrower on a HECM must be at least 62. Four more gates sit behind it.

Principal residence and property type: Eligible properties are dwellings designed principally as a residence for one family, plus additional families as the FHA Commissioner determines, and condominium units designed for one-family occupancy. You have to live there.
Enough equity to clear what you owe: A HECM pays off any existing mortgage first, out of your proceeds, which is why owning free and clear produces the most cash. See loan-to-value ratio for the equity math.
HUD-approved counseling, with a certificate: Borrowers, non-borrowing spouses, and non-borrowing owners must all be counseled by a HUD-approved counselor, who covers alternatives, suitability, and warnings about estate-planning services charging excessive fees. Agencies may charge a reasonable fee, but not one you can’t afford.
A financial assessment: The lender reviews income, assets, and credit to judge whether you can keep up with property charges. If it raises doubts, HUD’s rules call for a Life Expectancy Set-Aside: a slice of your borrowing power reserved for taxes and insurance. It protects the loan and shrinks your cash.

One structure catches people out. A spouse under 62 can be an eligible non-borrowing spouse, but only if named as one in the loan documents at closing.

How do reverse mortgage payouts work?

Your borrowing power is called the principal limit, and HUD says it turns on three inputs: the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, and the lesser of appraised value, the HECM FHA mortgage limit, or the sales price. HUD sets the maximum claim amount at 150% of the FHFA conforming baseline, which puts it at $1,249,125 for case numbers assigned in 2026 (HUD Mortgagee Letter 2025-22), so value above that number doesn’t count. The rate structure then sets your payout menu: a fixed-rate HECM comes with a single lump sum and no future draws, while an adjustable-rate HECM opens the monthly and line-of-credit options.

Payout option	How the money arrives	Rate treatment	Best fit
Single disbursement lump sum	One draw at closing, no future draws	Fixed rate only	A one-time obligation to clear, such as an existing mortgage
Tenure	Equal monthly payments for as long as the home stays your principal residence	Adjustable rate	A permanent income gap
Term	Equal monthly payments for a fixed number of months you choose	Adjustable rate	Bridging the years before a pension
Line of credit	You draw what you want, when you want, and the unused line grows	Adjustable rate	A standby reserve for repairs or medical bills
Modified term or modified tenure	Monthly payments plus a portion set aside as a line of credit	Adjustable rate	Income and a cushion at once

Two mechanics matter. You can’t take everything in year one: HUD caps first-year draws at 60% of the principal limit, the regulation lets the Commissioner set that percentage by notice and never below 50%, and you clear 60% only when mandatory obligations run higher, up to those obligations plus another 10%. Second, an unused line of credit isn’t static. Federal rules tie its growth to the rate at which your principal limit grows, so a line opened at 65 and left alone is larger at 75.

What you draw is not income. Advances are loan proceeds you must repay, so the IRS does not treat them as taxable and Social Security treats bona fide loan proceeds as not income for SSI. Though money you don’t spend counts as a resource starting the month after you receive it, which is where need-based benefits get affected. Interest runs the other way: it isn’t deductible until you actually pay it, and is generally subject to home equity debt limits unless the proceeds bought, built, or substantially improved the home.²

What does a reverse mortgage cost?

A HECM costs more upfront than a home equity loan, and the largest line is FHA’s insurance.

Upfront mortgage insurance premium, 2% of the maximum claim amount: Charged at closing no matter how much you draw in year one. On a home appraised at $320,000, that’s $6,400.
Annual mortgage insurance premium, 0.5% of the outstanding balance: Accrued over the life of the loan and added to what you owe, on top of the interest rate.
Origination fee, capped at $6,000: Lenders may charge 2% of the first $200,000 of the maximum claim amount plus 1% above that, with a $2,500 minimum. On that same $320,000 home the formula produces $5,200.³
Third-party closing costs and servicing: Appraisal, title work, recording, the counseling fee, and servicing charges vary by provider, so they’re the part worth shopping.

Most of these can be financed into the loan, which is convenient and expensive: financed fees start accruing interest and insurance immediately. Spread over fifteen years the upfront costs look reasonable. Over three, they rarely do.

When does a reverse mortgage have to be repaid?

A HECM becomes due and payable when the last surviving borrower dies, when the home is sold, or when it stops being a borrower’s principal residence. The rules add an absence trigger: if a borrower fails to occupy the property for longer than 12 consecutive months because of physical or mental illness, and it isn’t the principal residence of another borrower, the loan can be called. A hospital stay doesn’t start that clock. A permanent move into assisted living eventually does.

The other trigger is the one you control. HUD’s rules require you to keep hazard insurance on the property and provide for payment of property charges, so falling behind on taxes or letting insurance lapse can make the loan due and payable. That’s the most common avoidable path to foreclosure here, and the reason a Life Expectancy Set-Aside exists.

An eligible non-borrowing spouse can defer that status after the borrower dies, and HUD extended the same deferral to borrowers who move into a health care facility for more than 12 consecutive months, provided the spouse still occupies the home.

What happens to your heirs and your home equity?

Your heirs inherit a decision, not a debt. The servicer must notify the estate within 30 days of the loan becoming due, give them 30 days to respond, and begin foreclosure within six months, with 90-day extensions when the estate documents that it is actively working to sell or pay off. Four paths are open.

Sell and keep the difference: The most common outcome. Proceeds pay the balance and anything left belongs to the estate.
Refinance into a traditional mortgage: An heir who wants the property pays off the reverse mortgage with a new loan in their own name.
Pay 95% of appraised value: When the balance has grown past what the home is worth, HUD’s rules cap the sale or payoff at an amount that cannot exceed 95% of appraised value, and FHA insurance absorbs the shortfall.
Sign a deed in lieu of foreclosure: If nobody wants the house, the estate hands it back. There’s no deficiency to chase: the borrower has no personal liability, and the debt is enforced only through sale of the property.

Be honest with your family about the arithmetic. Compounding interest and the annual premium grow the balance every year you hold the loan, so inherited equity shrinks even while the house appreciates. That isn’t a defect in the product. It is the product. AARP’s guide for older homeowners weighing a reverse mortgage is a useful second read.

What are the alternatives to a reverse mortgage?

A reverse mortgage is one of several ways to reach home equity, and rarely the cheapest for a short-term need.

Home equity line of credit: Revolving, cheaper to open, and available well before 62, but it requires monthly payments and income to qualify. See how a HELOC works.
Home equity loan: A fixed lump sum at a fixed rate with a set payment, which suits a defined project. Our home equity loan tips cover the trade-offs.
Downsizing: Selling and buying smaller converts equity to cash with no interest clock. HUD’s HECM for Purchase even lets you buy the next primary residence with a reverse mortgage, covering the gap with cash on hand.
Selling and staying on as a tenant: A contract structure, not a loan program, and the risks run both ways. See lease option agreements.

One caution about niche products. Physician mortgage loans, equity-sharing agreements, and to a degree the piggyback mortgage are lender and investor products with no agency rulebook behind them, so terms vary by provider. A program engineered for one situation is expensive in every other one.

What Michigan homeowners should know

Michigan’s property tax rules bear directly on the obligation that keeps a reverse mortgage in good standing, and two of them are built for older homeowners.

The principal residence exemption is worth up to 18 mills: Michigan exempts an owner’s principal residence from the local school operating millage, up to 18 mills, under MCL 211.7cc. Claim it with Form 2368: filed by June 1 it covers that year’s summer and winter levies; filed after June 1 but by November 1 it covers the winter levy only.
Summer taxes can be deferred at 62 with income of $40,000 or less: Michigan lets a homeowner 62 or older, including the unmarried surviving spouse of someone 62 or older at death, defer summer property taxes when gross household income for the preceding calendar year is $40,000 or less. File Form 471 with your city, township or village treasurer by September 15, or by the date your summer taxes are due, whichever is later; a valid deferment then lets the summer bill be paid by February 14 without added penalty or interest (Michigan Department of Treasury, Form 471).
The homestead property tax credit is a separate refund: For the 2025 tax year Michigan capped it at $1,900 and limited it to total household resources of $71,500 or less, excluding homesteads with a taxable value above $165,400.

One warning: a deferment postpones the state’s due date, it does not erase the bill, and your servicer still tracks whether property charges are satisfied. Ask first.

How Align handles specialty financing

Specialty loans are where a single bank's menu runs out. Align places HomeStyle and FHA 203(k) renovation loans, non-warrantable condo loans, DSCR loans and standalone HELOCs through multiple wholesale lenders.

Samantha handles these files herself, from the first conversation to the closing table, with a processor supporting her behind the scenes. Complicated and impossible are not the same thing.

FAQ: Reverse mortgages

Here are answers to common questions about reverse mortgages.

What happens to a reverse mortgage when the borrower dies?

The loan becomes due. Heirs typically have several options: sell and keep any proceeds above the balance, refinance into a traditional mortgage to keep the property, or pay off the balance, or 95% of the appraised value, whichever is less. If the balance exceeds the home’s value, FHA insurance covers the shortfall, so heirs owe nothing extra.

Can you lose your home with a reverse mortgage?

Yes, but only for specific reasons. Failing to pay property taxes or homeowners insurance, letting the home fall into disrepair, or permanently moving out can make the loan due and payable and lead to foreclosure. A permanent move triggers it right away; only an absence caused by physical or mental illness gets a 12-consecutive-month window first. You keep title the entire time, so meeting those obligations is what protects your occupancy. If the loan stops fitting, refinancing a reverse mortgage is sometimes the cleaner exit.

Is reverse mortgage money taxable?

Generally no. Proceeds are loan advances rather than income, so the IRS does not treat them as taxable, and they usually do not affect Social Security or Medicare. They can affect need-based benefits like Medicaid or SSI if the funds sit in your account past the month you receive them. A draw on a home equity line of credit works the same way, for the same reason.

How much can you borrow with a reverse mortgage?

The amount depends on the youngest borrower’s age, the home’s appraised value, current interest rates, and the FHA lending limit. Older borrowers, higher-value homes, and lower rates all produce larger principal limits. Any existing mortgage is paid off first from the proceeds, which is why a homeowner still carrying a balance nets less cash than one who owns free and clear. The equity math is the same one behind any loan-to-value ratio.

The bottom line on reverse mortgages

A reverse mortgage lets a homeowner 62 or older turn equity into cash with no monthly mortgage payment, and the federally insured HECM counts home value up to a 2026 maximum claim amount of $1,249,125. What you draw depends on the youngest borrower’s age, the home’s value, and rates. The costs are real (a 2% upfront insurance premium, a 0.5% annual premium, an origination fee capped at $6,000) and so are the obligations: taxes, insurance, upkeep, and living there. In exchange the loan is non-recourse, and your heirs never owe more than 95% of appraised value.

If you’re weighing a reverse mortgage against a simpler equity loan, talk to Align Lending. We’ll shop your scenario across our lender network and put a HECM, a HELOC, and a home equity loan in front of you side by side. Call 248-506-5727 or start online. The CFPB’s plain-language reverse mortgage explainer is worth reading first.

Footnotes:

1. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA program figures are set by HUD and change; the 2026 maximum claim amount applies to case numbers assigned on or after January 1, 2026. Return to text.

2. This is general information, not tax or benefits advice. How reverse mortgage proceeds affect your taxes, Medicaid eligibility, or SSI depends on your circumstances. Consult a qualified tax professional and a benefits counselor. Return to text.

3. Example figures here are hypothetical and educational only; they are not an advertisement of credit terms or a rate quote under federal or state lending laws. Your principal limit, fees, and terms depend on your application, property, age, and market conditions. Return to text.

Figures current as of August 2026; verify with the linked source before relying on them.

Sources: 2026 HECM maximum claim amount of $1,249,125 for case numbers assigned on or after January 1, 2026, equal to 150% of the Freddie Mac national conforming limit of $832,750, HUD Mortgagee Letter 2025-22 and HUD No. 25-145. 2026 conforming baseline limit of $832,750, Federal Housing Finance Agency. Minimum borrower age of 62, principal residence requirement, and the three factors determining the amount available (age of youngest borrower or eligible non-borrowing spouse, current interest rate, and the lesser of appraised value, the HECM FHA mortgage limit, or sales price), U.S. Department of Housing and Urban Development, HECM program page; Consumer Financial Protection Bureau. HUD-approved counseling, counseling topics, and the counseling certificate, 24 CFR § 206.41; counseling fees may be charged but not to clients who cannot afford them, Consumer Financial Protection Bureau. Eligible property types, 24 CFR § 206.45. Payment options (term, tenure, line of credit, modified term, modified tenure, single lump sum), 24 CFR § 206.19. Single disbursement lump sum limited to fixed-rate HECMs, with the five other options available on adjustable-rate HECMs, HUD Mortgagee Letter 2014-11. Initial disbursement limit for the first 12-month disbursement period, and line of credit growth at the rate the principal limit grows, 24 CFR § 206.25. Life Expectancy Set-Aside definition and funding, HUD Handbook 4000.1 and the HECM Financial Assessment and Property Charge Guide. Upfront mortgage insurance premium of 2% of the maximum claim amount and annual premium of 0.5% of the outstanding balance, HUD; Consumer Financial Protection Bureau. Origination fee of 2% of the first $200,000 of the maximum claim amount plus 1% above that, with a $2,500 minimum and $6,000 maximum, HUD; Consumer Financial Protection Bureau. Non-recourse provision (no personal liability; debt enforced only through sale of the property), 24 CFR § 206.27(b)(8); hazard insurance and property charge obligations, 24 CFR § 206.27(b)(2) and (b)(6) and § 206.205. Due and payable when the property ceases to be the principal residence of a borrower for reasons other than death, 24 CFR § 206.27(c)(2)(i), and on failure to occupy for longer than 12 consecutive months because of physical or mental illness, 24 CFR § 206.27(c)(2)(ii). Eligible non-borrowing spouse deferral requirements and the health care facility provision, 24 CFR § 206.55 and HUD Mortgagee Letter 2021-11. Sale at not more than 95% of appraised value and the 30-day notice, 24 CFR § 206.125; six-month foreclosure timeline and 90-day extensions, HUD, Inheriting a Home Secured by an FHA-insured Home Equity Conversion Mortgage. Reverse mortgage advances are loan advances and not taxable income, and accrued interest is not deductible until paid and is generally subject to home equity debt limits, IRS Publication 936 and IRS Publication 554. Bona fide loan proceeds are not income for SSI and become a countable resource the month after receipt, SSA POMS SI 01120.220 and SI 00815.350. Michigan principal residence exemption of up to 18 mills of local school operating tax and Form 2368 filing deadlines of June 1 and November 1, MCL 211.7cc and 211.7dd; Michigan Department of Treasury. Summer property tax deferment for taxpayers 62 and older, including the unmarried surviving spouse of a person 62 or older at death, with gross household income of $40,000 or less, filing of Form 471 by September 15 or the date summer taxes are due (whichever is later), and payment by February 14 without additional penalty or interest, MCL 211.51; Michigan Department of Treasury Form 471 and Summer Tax Deferment FAQs. 2025 tax year homestead property tax credit maximum of $1,900, total household resources limit of $71,500, and taxable value limit of $165,400, Michigan Department of Treasury.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Reverse mortgage program figures, FHA limits, insurance premiums, fee caps, and Michigan tax thresholds change and vary by borrower, property, and county; confirm your figures with HUD, your counselor, and your Loan Estimate, and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.