How the Payoff Works
Start with the payoff. Then check the draw limit.
A written HECM proposal should show the borrowing limit, the debts being paid, costs, any reserves and the amount you can actually receive.
How the principal limit is calculated
The lender uses the age of the youngest borrower or eligible non-borrowing spouse, the expected interest rate and the lesser of the appraised home value or HUD’s maximum claim amount. For FHA case numbers assigned in 2026, that maximum claim amount is $1,249,125. It is a valuation ceiling for the calculation, not the amount you can borrow.
HUD Mortgagee Letter 2025-22: 2026 HECM limits
Payoffs and costs use the proceeds first
The existing mortgage payoff and any financed origination or third-party closing costs reduce the amount left for you. FHA also charges an initial mortgage insurance premium of 2% of the maximum claim amount used for your loan. That charge is based on the property value subject to HUD’s ceiling, not just the cash you receive. Required set-asides can further reduce available funds.
HUD Mortgagee Letter 2017-12: Mortgage insurance premiums
The first-year limit includes your payoff
Generally, total disbursements during the first 12 months are limited to 60% of the principal limit. That includes the money used for your mortgage payoff and required costs. When mandatory obligations exceed 50% of the principal limit, you may elect enough to cover them plus up to another 10% of the principal limit. This is still capped by the principal limit and applicable set-asides; it is not a guarantee of 10% in cash.
CFPB: Reverse Mortgage Servicing examination procedures (July 2026)
Your payout choice matters
With an adjustable-rate HECM line of credit, funds outside the first-year limit may become available after that period, subject to the loan terms and remaining availability. A fixed-rate HECM uses a single advance at closing. Do not assume a fixed-rate lump sum gives you a second payout after year one. Ask for the first-year amount for the specific payout option you are considering.
HUD Handbook 4000.1: HECM payment options
Which mortgages and liens can be paid off
HUD generally permits HECM proceeds to pay off non-HECM liens older than 12 months. A newer lien may qualify when you received no more than $500 in cash, including cumulative draws, or its funds were used exclusively for required property-standard repairs. A newer HELOC that does not meet those tests may still be paid off if the initial disbursement or closing advance stays at or below 60% of the principal limit. Bring the closing disclosure and draw history for review.
HUD Handbook 4000.1 (August 12, 2026): HECM lien seasoning and disbursements
The other HECM requirements still apply
Borrowers must be at least 62 and use the home as their principal residence. HUD-approved counseling is required. The lender reviews your ability to meet ongoing property charges; a set-aside may be necessary. The property must meet program standards, and delinquent federal debt must be resolved, potentially using loan proceeds.
CFPB: HECM eligibility (reviewed August 28, 2026)
When it may not work
If the payoff and costs exceed what the HECM can cover, you may need your own money at closing. Even when the payoff fits, little cash may remain. The new loan balance grows as interest and mortgage insurance accrue. Compare the benefit of ending the required principal-and-interest payment with the costs and effect on your remaining equity.
CFPB: Reverse Mortgages — A discussion guide (August 2021)
Compare alternatives in counseling
A HUD-approved counselor can help you compare a HECM with refinancing, a home equity loan or HELOC, or selling and moving. The right comparison includes the monthly budget, ongoing property costs and how long you expect to stay in the home.
FTC: Reverse Mortgages
