The single most misunderstood feature of a reverse mortgage is direction. A forward mortgage balance falls every month. A reverse mortgage balance rises every month, and it rises on a growing base.
What accrues each month
Three things are added to your balance: interest at the current note rate, the ongoing FHA mortgage insurance premium, and a servicing fee if your lender charges one (many no longer do). All three compound — next month's interest is calculated on this month's larger balance.
Draw strategy changes everything
Compounding only applies to money you have actually taken. Two borrowers with identical principal limits can end up in very different places:
- Lump sum at closing: The entire amount begins accruing on day one. Highest long-term balance.
- Line of credit, drawn as needed: Only drawn funds accrue. Meanwhile the undrawn portion grows at the same rate — you gain borrowing capacity while avoiding accrual.
- Tenure payments: Balance builds gradually as each monthly payment is advanced.
This asymmetry is why the line of credit is the most efficient structure for most borrowers who do not need all the money immediately.
A rough rule of thumb
At a combined accrual rate around 7%, a balance roughly doubles in about ten years if you take no further draws. At 8% it is closer to nine years. Compare that trajectory against expected home appreciation — if your home appreciates faster than the balance grows, equity is preserved; if slower, equity erodes.
You can pay it down
Reverse mortgages allow voluntary prepayment with no penalty. Some borrowers make occasional interest payments to control growth, and on a line of credit, repaid amounts restore available credit. It is worth asking your servicer how payments are applied.
The non-recourse floor
No matter how far the balance compounds, a HECM is non-recourse. At repayment, you or your heirs owe the lesser of the loan balance or 95% of appraised value. FHA insurance covers any shortfall. That cap is the reason the upfront insurance premium exists.
Model your own trajectory with the projections in our calculator, and read the amortization schedule guide for a month-by-month view.
