Non-recourse loan available to homeowners age 62 or older that lets them borrow against their home equity without making monthly payments. The loan balance is repaid only when the borrower dies or the home is sold or refinanced. Interest and mortgage insurance premiums are added to the balance each month, so the debt grows over time while the homeowner retains title and must maintain the property and pay property taxes and homeowners insurance.

The borrower receives a principal limit determined by the borrower’s age, the home’s appraised value, and current interest rates. The most common type is the FHA-insured Home Equity Conversion Mortgage (HECM). Interest rates matter because they dictate how quickly the loan balance will compound over time; higher rates mean faster balance growth, which requires a larger equity cushion, resulting in a lower initial principal limit to ensure the loan doesn’t outpace home appreciation. If the borrower chooses a line of credit structure, any unused portion grows automatically at the same rate the loan balance accrues, increasing available borrowing power over time.

When the loan becomes due, the home’s sale value caps the repayment amount. If the compounded loan balance exceeds the sale price, the FHA insurance fund absorbs the shortfall, protecting both the borrower (and heirs) from owing more than the home’s value and the lender from loss. The lender earns interest on the rising balance throughout the loan term, while the FHA insurer assumes the tail risk that the loan could ultimately exceed the property’s value.