Reverse Mortgage Example: What a $400,000 Home Gets You at 72 — and What It Costs Over 10 Years

Lenders typically lead with one number: how much cash a reverse mortgage would put in your pocket. For a 72-year-old with a $400,000 home and $60,000 left on a mortgage, using the actual HUD principal-limit factor table and today's expected rate of 7.68%, that figure is $61,800 net. The rest of the ledger — $17,000 in upfront costs that quietly compound alongside the loan, a federal rule that limits how much of that $61,800 you can touch in the first year, and a balance that reaches roughly $311,000 by year ten — tends to arrive later, if at all.

This page runs through all of it. The math uses the same Principal Limit Factor table HUD certifies and the same compounding formula the FHA Handbook specifies. Run any of these numbers against your own age and home value in the no-personal-info HECM calculator.

Step 1: What the HECM can actually lend

The HECM does not simply lend you a percentage of your home's appraised value. What you can borrow is set by the Principal Limit Factor (PLF) — a number HUD publishes in a 4,864-cell table keyed to the youngest borrower's age and the "expected interest rate" locked at closing. The expected rate is not your loan's note rate; it is a benchmark (roughly a 10-year Constant Maturity Treasury rate plus a margin) used specifically to set the PLF. As expected rates rise, the PLF falls: the lender needs to reserve for more interest accrual over the life of the loan.

At age 72 and an expected rate of 7.68%, the PLF is 0.347. Applied to our $400,000 home:

Line	Amount
Home value (capped at FHA lending limit of $1,249,125)	$400,000
PLF at age 72, 7.68% expected rate (HUD General Table)	0.347
Principal Limit — total HECM borrowing power	$138,800

Step 2: What gets subtracted before you see a dollar

Three charges come off the principal limit at closing. Almost all borrowers finance them — meaning they are added to the loan balance on day one and begin compounding immediately.

Cost	How it is set	Amount
Upfront mortgage insurance premium (MIP)	2% of the lesser of home value or FHA limit	$8,000
Origination fee	2% of first $200k + 1% above; cap $6,000	$6,000
Other closing costs (appraisal, title, counseling, recording)	Estimate — varies by lender and state	~$3,000
Total upfront		$17,000

After costs and the existing $60,000 mortgage payoff, the net is:

$138,800 principal limit
− $17,000 upfront costs
− $60,000 mortgage payoff
= $61,800 available to you

What that $17,000 costs on day one is one thing. What it costs over time is another. Financed into the loan at an effective compounding rate of 8.18% per year (7.68% interest + 0.5% annual MIP, applied monthly), those closing costs grow to roughly $38,400 by year ten. The closing line items in the pitch deck are not the last time you pay them.

Step 3: The rule most lenders explain last — the 60% first-year limit

HUD restricts how much of the principal limit a borrower can draw in the first 12 months. The ceiling is the greater of:

• 60% of the principal limit ($138,800 × 60% = $83,280), or
• Mandatory obligations — the mortgage balance plus the financed closing costs — plus 10% of the principal limit ($77,000 + $13,880 = $90,880).

In our example, mandatory obligations take the higher number: the year-one ceiling is $90,880. The $77,000 in mandatory obligations uses up almost all of that ceiling. What remains available as immediate net cash is $90,880 − $77,000 = $13,880.

The remaining $47,920 goes into a restricted line of credit that opens on day one of month 13. This rule applies to all adjustable-rate HECMs — by far the most common type — and is established under HUD Mortgagee Letter 2013-27.

One feature worth noting: while the $47,920 sits in that restricted line of credit, it grows at the same 8.18% effective rate the loan accrues. By month 13, the available line is roughly $51,990 rather than $47,920. The LOC growth is not a liability — it is a contractual commitment by the lender to honor a larger credit line — but it does not reduce the balance you already owe on the day-one draws.

Step 4: What the loan balance looks like in 10 years

A HECM has no required monthly payment. Interest and the 0.5% annual MIP accrue each month and are added to the outstanding balance — meaning the balance compounds. The effective rate is 8.18% per year (7.68% + 0.5% MIP), applied monthly at 0.682% per month, per HUD Handbook 4000.1 and 24 CFR § 206.111.

For this example, assuming full draw of the principal limit over the first 13 months:

Metric	Value
Starting loan balance (mandatory obligations + day-one cash)	$90,880
Month-13 LOC draw (grown from $47,920)	~$51,990
Effective compounding rate	8.18%/yr (0.682%/mo)
Estimated loan balance, year 10	~$311,500
Home value at year 10 (3%/yr appreciation assumed)	~$537,600
Estimated remaining equity, year 10	~$226,000

Starting equity was $340,000 ($400,000 home − $60,000 mortgage). Ten years later, remaining equity is roughly $226,000. The gap — about $114,000 — is what the cash, costs, and interest compounding together removed from the estate. The home's appreciation ($137,600 over 10 years at 3%/yr) offsets part of the loan's growth but does not eliminate it.

The non-recourse floor

One protection deserves clarity. Under the FHA insurance that backs every HECM, the loan is non-recourse: if the loan balance eventually exceeds the home's sale price — which happens most often when a borrower lives in the home for many decades — the estate owes only what the home sells for. The difference is covered by the FHA insurance fund (funded by the upfront and annual MIP). This is the insurance you are buying with that $8,000 upfront premium and the 0.5% annual charge: the lender's ability to lend even when it cannot know how long you will live.

What this means for the decision

The numbers above answer "how does it work?" — they are not a verdict on whether it is the right move. That depends on what you would do with the cash, what your alternatives cost, and how much the remaining equity matters to you or your heirs.

Some pointers on where this example breaks down as a blueprint for your situation:

• The expected rate moves monthly. At 6.50%, the PLF at age 72 is 0.393 — a principal limit of $157,200 on a $400,000 home versus $138,800 today. Rate changes materially affect what you can borrow.
• A non-borrowing spouse under 62 triggers a set-aside. If a spouse is under 62 and not on the loan, HUD requires a Life Expectancy Set-Aside (LESA) that reduces the available principal limit further. This example assumes both borrowers are 72 or that the home is single-occupancy.
• Property taxes, insurance, and maintenance are still your obligation. Falling behind on any of these counts as a default and can trigger the loan becoming due. This is the most common way a reverse mortgage goes wrong — not the loan terms themselves, but a borrower who stops being able to maintain the home.
• If income qualifies you for a HELOC, it almost certainly costs less. The HELOC rate today averages around 7.30%, with no 2% upfront MIP and a far lower origination cost. The HECM's advantage is qualifying on age and equity rather than income — and not requiring any payment. If you can pass the income test, HELOCs have real advantages.

For a full side-by-side of the alternatives — HELOC, home-equity loan, cash-out refinance, and downsizing — see our equity-tapping comparison. For a deeper treatment of when a reverse mortgage actually helps versus when it doesn't, read our balanced assessment and the full two-sided accounting of the costs. HUD requires independent counseling before any HECM proceeds — that session is where you get the exact numbers for your specific case. Our guide to the HUD counseling session walks through what to expect and how to use it.

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