Home Equity Conversion Mortgage (HECM)

A home equity conversion mortgage is the reverse mortgage insured by the Federal Housing Administration. The program's own regulation states its identity plainly: 24 CFR 206.1 says the purposes of the Home Equity Conversion Mortgage Insurance program "are set out in section 255(a) of the National Housing Act, Public Law 73-479, 48 Stat. 1246 (12 U.S.C. 1715z-20)," and 24 CFR 206.3 defines HECM simply as "a Home Equity Conversion Mortgage." It accounts for the great majority of reverse mortgages made in the United States, which is why the two terms get used interchangeably even though one is a category and the other is a specific insured product inside it.

What the loan is, who qualifies, what counseling is required, how the principal limit is derived, what it costs, the statutory protections that come with it and the obligations that stay with the borrower are all covered on the reverse mortgage page. This page covers the part that is specific to the insured program and that nothing else explains: how the money actually comes out, what choices the borrower makes about that, and what happens to those choices later.

Five payment options, set out in the regulation. 24 CFR 206.19 enumerates them, and they are genuinely different products in the borrower's hands.

Under the term option (206.19(a)) the lender makes equal monthly payments for a fixed number of months the borrower chooses. Under the tenure option (206.19(b)) the lender makes equal monthly payments for as long as the borrower occupies the property, until the mortgage becomes due and payable. Under the line of credit option (206.19(c)) the borrower draws what they want, when they want, within the permitted limits. The modified term and modified tenure options (206.19(d)) combine monthly payments with a line of credit, with a portion of the principal limit set aside to be drawn on. And the Single Lump Sum option (206.19(e)) advances a single amount at closing.

The fixed-rate constraint is the single most consequential product fact, and it is not obvious from the marketing. Under 24 CFR 206.17(b)(1), fixed interest rate mortgages "shall use the Single Lump Sum payment option." Adjustable rate mortgages take one of the other four, subject to later change. That single sentence has three consequences that follow it around. First, a borrower who chooses a fixed rate is choosing a lump sum, not a rate. Second, the definition of principal limit in 24 CFR 206.3 says that although the principal limit of a fixed interest rate HECM "will continue to increase at the rate provided by the Commissioner, no further funds may be made available for the borrower to draw against after closing." The number on paper keeps growing and none of it is reachable. Third, 24 CFR 206.26(b)(2) states flatly that borrowers with fixed interest rate HECMs "may not request a change in payment option." The choice is made once and cannot be revisited.

The line of credit grows, and that is the feature it is chosen for. 24 CFR 206.25(g) provides that where the borrower has a line of credit, "the line of credit amount increases at the same rate as the total principal limit increases under § 206.3." The principal limit itself, per 206.3, increases each month at one-twelfth of the mortgage interest rate then in effect plus one-twelfth of the annual mortgage insurance rate. So an untouched line compounds at roughly the loan's own all-in rate. The practical consequence is counterintuitive: opening a line early and not drawing on it makes more credit available later than waiting and opening one when the money is needed.

The first year is capped. 24 CFR 206.25(a)(1) limits what can be disbursed at closing and during the First 12-Month Disbursement Period to an Initial Disbursement Limit, calculated as the lesser of two figures. The first is the greater of an amount the Commissioner sets by notice, which the regulation requires to be at least 50 percent of the principal limit, or the sum of Mandatory Obligations plus a further percentage of the principal limit that the Commissioner sets and which must be at least 10 percent. The second is the principal limit less the funds set aside for property charges beyond the first year and for servicing fees. Mandatory Obligations are the origination costs the regulation lists, including the initial mortgage insurance premium, the origination fee, the counseling fee, and reasonable amounts actually paid for recording, credit report, survey, title examination, the lender's title insurance, the initial appraisal and flood certifications. The borrower elects at closing how much of the additional percentage to draw or leave available, and 206.25(a)(1)(v) says the borrower "may not increase or decrease this election after closing."

Three set-asides reduce what is actually available, and they are easy to miss in a quoted figure. Under 24 CFR 206.19(f), the lender sets aside part of the principal limit for each of three purposes. The Repair Set Aside is required where repairs will be completed after closing, and it is "150 percent of the Commissioner's estimated cost of repairs, plus the repair administration fee." A Property Charge Set Aside covers property taxes and flood and hazard insurance, either as a Life Expectancy Set Aside where required or chosen, or as a first-year set-aside where the borrower elects to have the lender pay the charges. The Servicing Fee Set Aside covers servicing charges over a period calculated the same way tenure payments are. Every dollar in a set-aside is a dollar of principal limit the borrower cannot spend, which is why a quoted principal limit and the money a borrower can actually use are different numbers.

The tenure calculation, stated exactly. 24 CFR 206.25(f)(1) computes monthly tenure disbursements "as if the number of months in the payment term equals 100 minus the lesser of the age of the youngest borrower or 95, multiplied by 12," while providing that payments continue until the mortgage becomes due and payable. So the payment is sized on an assumed horizon to age 100, but the obligation to pay is not limited to it. A borrower who lives past that horizon keeps receiving payments, which is the insurance doing its work.

Changing the payment option later. For an adjustable rate HECM, 24 CFR 206.26(b)(1)(ii) permits the borrower, after the First 12-Month Disbursement Period and so long as the outstanding balance is less than the principal limit, to request a recalculation of the current option, a change to any other available option, or a disbursement of any amount up to the difference between the principal limit and the sum of the balance and any set-asides. The lender may charge a fee for the change, capped at an amount the Commissioner determines.

Shared appreciation exists and is rare. 24 CFR 206.23 permits a mortgage on which the lender has chosen the shared premium option to provide that the borrower pay, when the loan becomes due or is paid off, an additional amount of interest equal to a percentage of any net appreciated value. The regulation caps that appreciation margin at "no more than twenty-five percent, subject to an effective interest rate cap of no more than twenty percent," and requires the lender to disclose, at application, the principal limit, payments and interest rate for a comparable mortgage without shared appreciation. Where a borrower is offered one, that comparison disclosure is the document to read.

What the maximum claim amount is, and the figure for this year. 24 CFR 206.3 defines the maximum claim amount as the lesser of the appraised value, the sale price where the property is being purchased as a principal residence, or the national mortgage limit for a one-family residence under section 255(g) or (m) of the National Housing Act as of the date of closing. For calendar year 2026 that national limit is $1,249,125, and HUD applies the same figure in Alaska, Hawaii, Guam and the United States Virgin Islands. It caps what the insurance covers, which is why a home worth more than the limit produces the same principal limit as one worth exactly the limit.

HECM for Purchase. The regulation contemplates buying a home with a HECM rather than converting equity in one already owned. 24 CFR 206.44 requires the borrower to bring a monetary investment at closing "to satisfy the difference between the principal limit and the sale price for the property, plus any HECM loan-related fees that are not financed into the loan, minus the amount of the earnest deposit," and lists the permitted sources: cash on hand, cash from the sale or liquidation of assets, HECM proceeds, and other sources the Commissioner approves. 24 CFR 206.52 adds that the property must be purchased from the owner of record and that the transaction may not involve any sale or assignment of the sales contract, with time restrictions on quick resales.

What the estate may do, stated precisely rather than as the usual shorthand. The line people repeat is that heirs can buy the home for 95 percent of appraised value. What 24 CFR 206.125(a)(2) actually provides is that the lender gives the borrower, the eligible non-borrowing spouse, the estate or the heirs 30 days from the notice that the mortgage is due and payable to take one of several actions, one of which is to sell the property "for an amount not to be less than the amount determined by the Commissioner through notice, which shall not exceed 95 percent of the appraised value." The 95 percent is a ceiling on what HUD may require, not a price the estate pays. The other listed actions are paying the outstanding balance in full, providing the lender with a deed in lieu of foreclosure, or correcting the condition that made the loan due and payable. The same paragraph caps closing costs on such a sale at the greater of 11 percent of the sales price or a fixed dollar amount the Commissioner sets by notice.

After counseling, application, appraisal and underwriting, the lender computes the principal limit, subtracts any required set-asides, and the borrower chooses a payment option. Existing mortgage debt is paid off first. From then on, money moves according to the option chosen, and interest and the ongoing insurance premium accrue on whatever has been advanced.

A hypothetical example of why the line of credit is chosen. Suppose two borrowers each have a principal limit of $260,000 after set-asides and mandatory obligations, and each has $80,000 of it left over after paying off an existing mortgage and closing costs.

The first borrower takes an adjustable-rate HECM with a line of credit and does not draw on the remaining $80,000. Suppose the loan's interest rate plus the annual mortgage insurance rate together come to a hypothetical 6.5 percent, so the line grows at one-twelfth of that each month. After five years the available line is $80,000 multiplied by 1.0054167 raised to the sixtieth power, which is about $110,600. The borrower has done nothing, owes nothing on that portion, and has roughly $30,600 more credit available than they started with.

The second borrower takes a fixed-rate HECM, which means a Single Lump Sum. They receive the $80,000 at closing. Interest begins accruing on all of it immediately, whether or not it is spent. Their principal limit also keeps growing on paper at the rate the Commissioner provides, but 24 CFR 206.3 makes no further funds available to draw against, and 24 CFR 206.26(b)(2) bars them from requesting a change of payment option. Five years later the growth in that principal limit has produced nothing they can use.

The difference between the two is not the interest rate. It is that one structure keeps optionality and the other spends it at closing.

Pros

• Five payment structures, so the loan can be shaped to a monthly income need, a standing reserve, a one-time cost, or a combination.
• An undrawn line of credit grows at the same rate the principal limit grows, which rewards opening one before the money is needed.
• On an adjustable-rate loan the payment option can be recalculated or changed after the first year, so a decision made at 68 is not binding at 80.
• Interest accrues only on what has actually been advanced, so an untouched line costs nothing but the ongoing premium on the balance outstanding.
• HECM for Purchase allows a move without taking on a monthly mortgage payment, using a defined monetary investment at closing.

Cons

• Choosing a fixed rate means choosing a lump sum, losing both the growth feature and any later change of payment option.
• Interest and premium on a lump sum begin accruing on the whole amount at closing, including the part the borrower has no immediate use for.
• Set-asides for repairs, property charges and servicing can consume a large share of the principal limit before the borrower sees any of it.
• The first-year disbursement cap and the closing election limit flexibility in exactly the year a borrower is most likely to have costs.
• The maximum claim amount caps the calculation, so a home worth well above the national limit produces no more principal limit than one worth the limit.