Understanding the 60% Rule for Reverse Mortgages: A Guide to Your Initial Payout

For older homeowners considering a reverse mortgage, the "60% rule" is a critical factor that determines how much money you can access in the first year. This federal regulation limits your initial draw from a Home Equity Conversion Mortgage (HECM)—the most common type of federally insured reverse mortgage—to 60% of your total available loan proceeds in the first year. The primary goal is to act as a financial safeguard, ensuring you do not deplete your home equity too quickly and thereby promote long-term financial stability throughout your retirement.

What Is the 60% Reverse Mortgage Rule?

The 60% rule is a mandate from the U.S. Department of Housing and Urban Development (HUD) that applies specifically to HECM loans. It states that during the initial 12-month period after your loan closes, you cannot access more than 60% of the total principal limit (the maximum amount you are eligible to borrow). The rule is designed to protect borrowers by ensuring a larger portion of their home equity remains available for future needs, such as unexpected healthcare costs or property taxes. It is important to note that this limit applies only to the initial disbursement; any remaining funds become accessible after the first year.

How Does the 60% Rule Work in Practice?

To understand the rule’s impact, consider a practical example. Suppose your HECM principal limit is $300,000. Under the 60% rule, your maximum first-year draw would be $180,000 (60% of $300,000). The remaining $120,000 is placed in a line of credit or set aside for future payments, which can continue to grow in value over time. This structure helps mitigate the risk of borrowers using all their equity immediately and facing financial hardship later. There are exceptions to this rule, such as if you have mandatory obligations—like paying off an existing mortgage—that require a larger initial sum.

Why Was the 60% Rule Implemented?

The rule was implemented by HUD to enhance the long-term sustainability of reverse mortgages for seniors. Before its introduction, some borrowers accessed nearly all their equity upfront, which increased the likelihood of defaulting on property-related obligations like homeowners insurance and property tax payments. By limiting the initial payout, the rule helps ensure that sufficient equity remains to cover these ongoing costs, reducing the risk of foreclosure and helping retirees maintain both their home and financial security.

What Are the Key Considerations for Borrowers?

Based on our experience assessment, the 60% rule means that a reverse mortgage is generally better suited for long-term financial planning rather than an immediate, large cash infusion. Before proceeding, homeowners should:

• Calculate Needs Accurately: Use a HECM calculator to understand your principal limit and how the 60% draw aligns with your first-year financial requirements.
• Plan for the Long Term: View the funds that are restricted in the first year as a growing financial reserve for future years.
• Consult a HUD-Approved Counselor: Mandatory counseling is required for all HECM applicants. This is the best opportunity to ask how the 60% rule and other loan terms specifically apply to your situation.

The 60% rule is a protective measure that encourages a measured approach to accessing home equity. While it may limit immediate cash flow, its design directly contributes to lasting financial security for retirees by preserving a significant portion of your home's value for future needs. Understanding this rule is the first step in determining if a reverse mortgage aligns with your retirement goals.