How does interest work on a reverse mortgage?
What accrues, what compounds, and what you can control

The basics: how it's different from a regular mortgage

With a traditional mortgage, you borrow a set amount and make monthly payments that cover both principal and interest. Over time, your balance goes down.

A reverse mortgage works in the opposite direction. You receive money from the lender (as a lump sum, line of credit, or monthly payments), and interest accrues on the amount you've borrowed. Since you're not making monthly payments, the interest gets added to your loan balance. Over time, your balance goes up.

This is the fundamental trade-off of a reverse mortgage: you give up some future equity in exchange for accessing that equity now — without a monthly payment obligation.

What does interest accrue on?

This is an important distinction that many people miss: interest only accrues on the money you've actually borrowed, not on your total available credit.

How does compounding work on a HECM?

Interest on a HECM compounds — meaning you're charged interest on previously accrued interest. This is the same way any loan works when you're not making payments. Over many years, this can cause the loan balance to grow significantly.

Here's a simplified example: say you borrow $100,000 at a 6% annual rate. After one year, about $6,000 in interest is added to your balance — making it $106,000. The next year, interest accrues on $106,000, not $100,000. Over 10 years, the balance would grow to roughly $179,000. Over 20 years, roughly $321,000.

That sounds like a lot — but remember two things. First, your home is likely appreciating over those same years. Second, the non-recourse guarantee means the balance can never exceed what your home is worth for repayment purposes. If the balance does grow past the home's value, FHA insurance covers the difference. You and your heirs are protected.

Fixed rate vs. adjustable rate

Most borrowers choose the adjustable rate — not because they want rate uncertainty, but because it unlocks the flexible payout options that make a HECM most useful (especially the growing line of credit).

How can you manage interest growth?

You have more control than you might think:

Draw only what you need. Using the line of credit and pulling funds as needed — rather than taking a lump sum — keeps your borrowed balance lower and reduces total interest over time.

Make voluntary payments. HECM payments are always optional and penalty-free. If you want to pay down the balance or cover accrued interest, you can — in any amount, at any time. Some borrowers make regular payments to manage their balance.

Understand the trade-off. The interest you "pay" through balance growth is the cost of having no required monthly payment. For many retirees, that trade-off is worth it — especially when the alternative is draining savings or going back to a monthly mortgage.

Interest accrues — but context matters

Interest on a reverse mortgage works the same way interest works on any loan where payments are deferred — it accrues and compounds. The difference is that you have the non-recourse guarantee backing you up, meaning the math can never work against your family. Your loan balance can never exceed what your home is worth for repayment purposes.

If you want to see exactly how interest would affect your loan balance over 5, 10, or 20 years, try our calculator or reach out. I'll walk you through the numbers so there are no surprises.