Reverse Mortgage Basics: How HECMs Work

A reverse mortgage lets a homeowner 62 or older borrow against home equity without making monthly loan payments; instead, interest and fees are added to the balance, and the loan is repaid when the last borrower dies, sells or moves out. The most common type is the FHA-insured Home Equity Conversion Mortgage (HECM), and it is not free money: the balance grows every month, and your heirs inherit less equity.

This guide explains how HECMs work under HUD and CFPB rules, the New York-specific protections, and why NYC co-op owners need a different, private product.

Who qualifies for a HECM

The CFPB lists these requirements:

• You are 62 or older.
• The home is your principal residence: you live there most of the year.
• You own the home outright, or your remaining mortgage is small enough to pay off with the reverse mortgage at closing.
• You owe no federal debt, such as unpaid federal income taxes or federal student loans.
• You pass a financial assessment: you have enough money, or set aside loan funds, to keep paying property taxes, insurance and maintenance.
• The home is in good shape.
• You complete counseling with a HUD-approved reverse mortgage counseling agency.

How much you can borrow (the principal limit) depends on the youngest borrower’s age, the interest rate, and the home’s value up to HUD’s national cap, which HUD resets each year. Any existing mortgage is paid off first, which reduces what is left for you.

How you can take the money

What it costs

• Origination fee paid to the lender, $6,000 or less. In New York, lenders may charge only the fees DFS allows under Part 79.8, and on a proprietary (non-HECM) loan they may collect only an application fee, appraisal fee and credit report fee before closing.
• Upfront FHA mortgage insurance premium at closing.
• Third-party closing costs: appraisal, title, recording fees and, in New York, mortgage taxes.
• Ongoing: interest, a servicing fee, and an annual mortgage insurance premium equal to 0.5% of the outstanding balance, all added to the loan each month.
• Counseling fee, if any, which must be reasonable and affordable for you.

Because interest is charged on prior interest, NY DFS notes the balance grows faster over time and can consume a large share of your equity. Borrowing less keeps ongoing costs down.

What makes the loan due

1. 1

   The last borrower dies

   Or the last Eligible Non-Borrowing Spouse who is allowed to stay (see below).
2. 2

   You sell the home

   The loan is paid from the sale proceeds.
3. 3

   You stop living there

   The home must be your principal residence. If you are in a healthcare facility for more than 12 consecutive months and no co-borrower lives there, the loan can come due.
4. 4

   You break the loan terms

   Not paying property taxes or homeowners insurance, or not keeping the home in good repair, can trigger a default and foreclosure.

Non-recourse: what you and your heirs can owe

A HECM is non-recourse. NY DFS states that lenders cannot pursue your other assets or your estate for a shortfall. When the loan comes due, the CFPB explains that heirs have three choices:

• Keep the home by paying the full loan balance, often with their own new mortgage.
• Sell it and repay the balance, or, if the balance is more than the home is worth, pay at least 95% of the appraised value. FHA insurance covers the rest.
• Hand the home to the lender.

After a due-and-payable notice, heirs generally have 30 days to buy, sell or turn the home over, and the timeline can be extended up to six months. Talk to the servicer immediately. For more on estate planning, see passing your home to heirs in New York.

Spouses who are not on the loan

If one spouse is under 62 or is left off the loan, that spouse is a non-borrowing spouse. Under HUD rules, an Eligible Non-Borrowing Spouse may be able to stay in the home after the borrower dies or moves to long-term care, but whether you qualify depends on when the loan was made and other conditions, and the CFPB notes it can be hard to qualify. New York separately says an eligible surviving non-mortgagor spouse who gets clear title within 90 days of the borrower’s death has 120 days to satisfy the loan and keep the home, by paying the lesser of the balance or 95% of the appraised value. Make sure the spouse’s status is documented correctly at closing.

New York rules and loan types

Co-ops: because a co-op owner holds shares and a proprietary lease rather than a deed, a standard HECM does not fit. New York allows a separate proprietary reverse loan secured by co-op shares under Banking Law § 6-o. DFS describes it as not affiliated with the HECM program or the federal government, and your co-op’s proprietary lease and board rules still apply. DFS publishes a list of counselors for co-op reverse loans.

Other New York protections listed by DFS:

• No interest on line-of-credit money until you draw it.
• Three days after signing a commitment to cancel (third-party fees already paid may still be owed).
• You can name a third-party designee to receive termination notices; if you don’t, notices go to the local office for the aging.
• Not living in the home for any 365-day period without telling the lender is listed as a default trigger.

Is it right for you?

A reverse mortgage can help a house-rich, cash-poor owner who plans to stay put for many years and can keep paying taxes and insurance. It is a poor fit if you may move soon, want to leave the home free and clear, or would struggle with property charges. Before deciding, compare alternatives:

• A HELOC, home equity loan or cash-out refinance (these require monthly payments).
• Selling and downsizing.
• Property tax relief for seniors, such as the Senior Citizen Homeowners’ Exemption and STAR.

Check your equity first with the home equity calculator. Be wary of anyone pushing a reverse mortgage to pay for home repairs or investments; the CFPB warns about contractors who pitch reverse mortgages to pay for repairs and about ads that imply VA approval (the VA does not offer reverse mortgages).

General information, not financial or legal advice. Talk with a HUD-approved counselor, and consider an elder-law attorney, before you sign.