A HECM reverse mortgage can pay you in a lump sum, in monthly payments, through a line of credit, or through a mix of monthly payments and a line of credit. Which ones you can pick depends on the interest rate you choose, and the choice changes how fast the loan balance grows and how much money is still there for you in ten years. HUD writes the rules for all of this in its regulation, 24 CFR part 206, so every lender offering a HECM has to work within the same menu. This page walks through each payout option, the first-year limit that applies to all of them, and how to match an option to what you need the money for.
The payout options HUD allows
HUD's regulation, 24 CFR 206.19, lists the ways a HECM can pay out:
- A single lump sum, paid once at closing. It is the only option on a fixed-rate HECM.
- Tenure payments: equal monthly checks for as long as you live in the home and the loan stays in good standing.
- Term payments: equal monthly checks for a number of months you choose.
- A line of credit you draw on when you want, in the amounts you want, up to what's available.
- Modified tenure or modified term: monthly payments plus a line of credit set aside for larger or unexpected costs.
Every option except the fixed-rate lump sum comes with an adjustable rate. An adjustable-rate borrower who wants a big amount up front can still get one by drawing on the line of credit at closing, up to the first-year limit explained below. People often call that a lump sum too, but HUD treats it as a line of credit draw, and the difference matters later.
The first-year limit applies to everyone
You can't take the whole loan in year one. HUD caps what you can receive at closing and during the first 12 months. Under HUD's model HECM loan agreement (section 1.8, last revised October 31, 2023), the cap is the greater of two numbers: 60% of your principal limit, or your mandatory obligations plus 10% of your principal limit. The principal limit is the total amount you qualify to borrow, based on the youngest borrower's (or eligible non-borrowing spouse's) age, the expected interest rate, and the home's value up to the 2026 HECM limit of $1,249,125.
Mandatory obligations are the costs that must be paid at closing or in the first year to make the loan happen. Under 24 CFR 206.25 they include the upfront FHA mortgage insurance premium (2% of the home value HUD counts, per HUD Mortgagee Letter 2017-12), the origination fee, the counseling fee, title and recording costs, any existing mortgage or lien that has to be paid off, and property taxes and insurance when they are paid at closing or scheduled to be paid from the loan during the first year.
Here's an illustration with round, made-up numbers. Say your principal limit is $400,000 and your mandatory obligations are $30,000. Sixty percent is $240,000; obligations plus 10% is $70,000. The larger number wins, so you could receive up to $240,000 in the first year. Now say you also owe $250,000 on an existing mortgage, so your mandatory obligations are $280,000. Obligations plus 10% comes to $320,000, which beats $240,000, so the first-year cap becomes $320,000 and most of it goes to paying off the old loan. After the first year, an adjustable-rate borrower can reach the rest of the principal limit.
The fixed-rate lump sum: one draw, then it's done
A fixed-rate HECM pays a single lump sum at closing, and the same first-year cap applies to it. Whatever principal limit sits above that cap is never paid out. Under 24 CFR 206.3, once a fixed-rate loan closes, no more money becomes available to draw. You also can't switch to another payout option later (24 CFR 206.26), and if you pay part of the balance down, that freed-up room can't be borrowed again.
That trade gives you a rate that never moves and a known amount of cash on day one. It fits a borrower who needs a large sum right away, for example to pay off an existing mortgage, buy a home with a HECM for purchase, or clear a debt. It's a poor fit if you just want a cushion. Interest builds on every dollar of a lump sum from the day it's paid, whether the money is spent or sitting in a savings account.
Monthly payments: tenure or term
Tenure payments last as long as the loan isn't due, meaning you still live in the home as your principal residence and keep up with taxes, insurance and upkeep. HUD sizes them under 24 CFR 206.25(f) as if the loan ran until the youngest borrower turned 100, with a floor of 60 months for a borrower 95 or older. As an illustration, a youngest borrower of 70 gets payments calculated over 360 months, but the payments keep coming past that point if the loan is still in place. If one spouse isn't on the loan, monthly payments and line of credit draws stop when the borrowing spouse dies, even though an eligible non-borrowing spouse can stay in the home.
Term payments are larger for the same principal limit when you pick a shorter term, because they stop after the number of months you choose. They make sense for a gap you can see the end of, such as the years before a pension starts or before you plan to sell. Under 24 CFR 206.25(e), the lender has to keep making term payments through the full term even if rising rates push the balance past the principal limit.
The rules also protect your payment date. Under 24 CFR 206.25(j), if a lender doesn't send a monthly payment on the first business day of the month, it owes you a late charge of 10% of the missed amount, up to $500, paid from its own funds.
The line of credit and how the unused part grows
The line of credit is the most flexible option, and its unused balance grows. Under 24 CFR 206.25(g), the available line grows at the same rate as the principal limit, and 24 CFR 206.3 sets that rate as the loan's interest rate plus the annual mortgage insurance rate (0.5%, per HUD Mortgagee Letter 2017-12), added each month. You pay no interest on money you haven't drawn, because interest only accrues on the outstanding balance (24 CFR 206.19(g)). So an untouched line gets bigger every month, and the higher rates are, the faster it grows.
That growth is why some owners set up a HECM line early and leave it alone as a backup for medical bills or a big repair. The money is there if you need it, and if you don't, the balance stays small. The lender must fund a draw within 5 business days of your request, or pay the same 10% late charge.
A bank home equity line works differently: you make monthly payments on it, and the draw period ends. Our reverse mortgage vs. HELOC comparison goes through those differences in detail.
Combining the two: modified tenure and modified term
The modified plans split the principal limit. Part of it pays you every month, and part sits in a line of credit for the bills you can't predict. A borrower who wants a steady check for groceries and utilities, plus a reserve for a new roof or a car, often ends up here. The line portion grows the same way a stand-alone line does.
Can you change your payout option later?
With an adjustable-rate HECM you aren't locked in. Under 24 CFR 206.26, you can change plans during the first 12 months as long as your total draws stay within the first-year limit. After that, as long as your balance is below your principal limit, you can ask to switch from one payout option to another, recalculate your monthly payment, or take a lump draw from what's available. The lender may charge a fee for the change, capped by HUD. A fixed-rate HECM doesn't allow any change at all.
Property taxes come first in Orange County
Whatever option you pick, the loan stays in good standing only if property taxes and homeowners insurance get paid. In Orange County, the first property tax installment is due November 1 and goes delinquent after December 10, and the second installment's deadline is April 10, according to the Orange County Treasurer-Tax Collector. Depending on the lender's review of your finances, HUD's rules (24 CFR 206.19(f)) can require a set-aside of part of your principal limit, called a Life Expectancy Set-Aside, to pay those bills. That set-aside comes off the money available to you. If a new tax bill hasn't been issued at closing, 24 CFR 206.25 has the lender estimate first-year taxes at last year's amount times 1.04.
On a coastal home with a large tax bill, that can noticeably shrink a monthly payment or a line, so ask the lender to show the set-aside, if any, before you choose a payout option.
How to choose
- Paying off an existing mortgage or buying a home: the payoff counts as a mandatory obligation. A fixed-rate lump sum or a large line draw at closing usually does the job.
- Covering a monthly shortfall for life: tenure, or modified tenure if you also want a reserve.
- Bridging a known number of years: term, or modified term.
- Keeping a reserve you may never use: a line of credit, left alone so it can grow.
Ask the lender to show how the balance would grow under each option you're weighing, along with the total annual loan cost (TALC) table every reverse mortgage borrower receives. A lump sum and an untouched line can look very different by year ten. To see how fixed and adjustable rates differ, read how reverse mortgage rates work, and for the fees behind those mandatory obligations, see what a reverse mortgage costs.
Talk it over with Esther
Owner Esther Buede at Choice Home Mortgage can run the same home through each payout option with you, so you can see the first-year cap, the monthly figure and the line of credit side by side before you pick one. You can start on the reverse mortgage page, try the reverse mortgage calculator, or call (949) 522-7310. You can look up any loan officer on NMLS Consumer Access: Choice Home Mortgage is NMLS #2629064, and Esther Buede is NMLS #2003644.
Choice Home Mortgage (NMLS #2629064, CA DRE #01822046) is a California-licensed mortgage broker and an Equal Housing Opportunity company. This article is for general educational purposes and is not a commitment to lend or financial advice; loan approval and terms are subject to lender requirements and your individual circumstances.
