How a HECM Reverse Mortgage Works
A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage, backed by the U.S. Department of Housing and Urban Development (HUD). It allows homeowners aged 62 or older to convert home equity into tax-free cash without making monthly mortgage payments.
The maximum amount a borrower can access is the Principal Limit, determined by HUD tables using the youngest borrower's age and the current interest rate. This factor is the Principal Limit Factor (PLF).
The math is formulated as follows:
Maximum Principal Limit = Home Value × PLF
Initial Net Principal Limit = Maximum Principal Limit - Existing Mortgage - Upfront MIP (2% of Home Value) - Other Upfront Fees
Note that the 2% upfront FHA Mortgage Insurance Premium is deducted from proceeds automatically, in addition to whatever origination and closing costs you enter separately — both come out of the same Principal Limit before you see any net cash. The Net Principal Limit can be distributed as a lump sum, a line of credit, or monthly payments (tenure or term). Tenure payments provide guaranteed monthly payouts for life, calculated using an annuity factor based on life expectancy.