Home Equity Conversion Mortgage (HECM) Annual Statement Explained

The Home Equity Conversion Mortgage (HECM) annual statement is one of the most important and often misunderstood documents a reverse mortgage borrower will receive. Unlike a traditional mortgage bill that prompts a payment, the HECM statement is a comprehensive financial health report for your loan.

Key Takeaways

Your Statement is a Financial Report, Not a Bill: Unlike a traditional mortgage bill that signals a payment is due, the HECM annual statement is a comprehensive check-up on your loan’s financial health and your home equity. Its primary purpose is to provide a transparent, detailed picture of how your loan is evolving over time.
Your Loan Balance is Designed to Increase: With a HECM, the loan balance grows over the life of the loan as you draw funds and as interest, insurance premiums, and fees are added to the balance. This increase is driven by compounding, where interest is charged on the principal borrowed as well as on previously accrued interest and fees.
The “Non-Recourse” Feature Protects You and Your Heirs: Every HECM is a non-recourse loan, which guarantees that you or your heirs will never owe more than the value of your home when the loan is sold. However, heirs must still settle the loan after the last borrower passes away or leaves the home. They can choose to repay the full loan balance, sell the property, or pay 95% of the home’s appraised value (whichever is less) if they wish to keep the home.
Borrowers Have Crucial Ongoing Responsibilities: While there are no monthly principal and interest payments, borrowers must meet three core obligations to avoid default. These include paying all property charges like taxes and insurance on time, maintaining the home in good repair, and occupying the property as a principal residence.
The Line of Credit Growth is a Powerful Feature: For adjustable-rate HECMs, the unused portion of your line of credit grows and compounds over time. This increases the amount of money you can access in the future, and this growth is contractual and not dependent on your home’s value appreciating. Instead, it is tied to your loan’s interest rate plus the annual MIP, meaning growth may accelerate when interest rates are higher.

Decoding Your HECM Statement: The “Big Picture” Numbers

The top of your statement provides a high-level summary of your loan’s status, offering an at-a-glance view of your overall financial position. These figures are the most critical to understand as they frame all the other details in the document. By grasping these core numbers, you can quickly assess your borrowing power, what you owe, and what you can still access.

Principal Limit (PL): Your Total Borrowing Power

This figure represents the maximum amount of money you can receive from your HECM over its lifetime, as calculated at your loan closing. The Principal Limit is not your loan balance; it is your total borrowing power. The FHA determines this limit based on the youngest borrower’s age, the home’s appraised value up to the FHA lending limit, and the expected interest rate at origination.

Current Total Loan Balance: What You Owe

This is the most important number on the statement, representing the total amount you currently owe the lender. This balance is the sum of all cash advances you have received from the start of the loan. It also includes all the accrued interest, mortgage insurance premiums (MIP), and servicing fees that have been added since the loan began.

Current Available Line of Credit: Your Remaining Funds

If you have a line of credit payment plan, this number shows how much you can still draw from your loan. It is calculated by taking your Current Principal Limit and subtracting both your Current Total Loan Balance and any funds held in “set-asides”. This figure represents your immediate, accessible equity.

Growth of Principal Limit: A Unique Feature

For HECMs with an adjustable interest rate and a line of credit, the Principal Limit itself grows over time. A growth amount may be shown on your statement, reflecting this powerful feature. This means your total borrowing capacity can increase, regardless of whether your home’s market value changes.

A Line-by-Line Breakdown of Your Loan Balance Growth

Your “Current Total Loan Balance” is not a static number; it is the cumulative result of all activity on your account since day one. Understanding its components is essential to understanding how your loan evolves each month. The balance starts with your initial draw and grows as several charges are added to it over time.

Cash Advances and Draws

This is the total amount of money you have received from the lender. It includes any funds used at closing to pay off a prior mortgage, any lump-sum payments you received, scheduled monthly payments, and any draws you have made from your line of credit. This line item represents the principal you have actively borrowed.

Accrued Interest and Compounding

Interest is the primary driver of your loan balance growth. It is charged monthly on the outstanding loan balance and then “compounds”. This means that in the following month, you are charged interest not only on the principal you’ve borrowed but also on the interest that was added in previous months.

Mortgage Insurance Premiums (MIP): The FHA Guarantee

As an FHA-insured loan, a HECM requires two types of mortgage insurance premiums. These premiums primarily protect the lender against loss if your loan balance exceeds your home’s value when it is repaid. At the same time, they benefit you as the borrower by enabling the non-recourse protection and ensuring your line of credit continues to grow, even if your home’s value declines.

Up-front MIP: This is a one-time premium paid at closing, calculated as 2% of your home’s appraised value or the FHA lending limit, whichever is less. Since 2017, HUD has applied a flat 2% rate for nearly all HECMs, though older loans may have used different rates (0.5% or 2%) depending on borrowing amounts.
Annual MIP: This is an ongoing premium charged throughout the life of the loan. It is calculated at a rate of 0.5% of the outstanding loan balance and is accrued monthly, adding to your total balance.

Servicing Fees

Some lenders may charge a monthly servicing fee, typically between $30 and $35, for managing the loan account. However, most modern HECMs no longer include this fee, so many borrowers today will not see a monthly servicing charge.

Just like interest and MIP, this fee is added to your loan balance each month. Your original loan documents will specify if this fee applies to your HECM.

Understanding Set-Asides (LESA and Repair)

In some cases, a portion of your Principal Limit is held in reserve for a specific purpose and is unavailable for you to draw as cash. Your statement will list any applicable set-asides.

A Life Expectancy Set-Aside (LESA) may be required if the lender’s Financial Assessment determines a potential risk of you being unable to pay your property taxes and homeowner’s insurance in the future.
A Repair Set-Aside may be established at closing if your home needs repairs to meet FHA property standards.

Your Monthly Transaction History: The Financial Diary

This section of your annual statement provides a detailed, month-by-month breakdown of all the activity on your loan for the past year. It is the most granular part of the statement and is the best place to check for accuracy. For each month, you can track your beginning balance, any draws, and the precise amounts added for interest, MIP, and servicing fees, culminating in the ending balance.

To make the concept of compounding tangible, consider an example of how a loan balance might grow over three months, even with no new funds being drawn. This sample calculation assumes a starting loan balance of $100,000, an annual interest rate of 5.0%, and an annual MIP rate of 0.5%.

In the first month, the $100,000.00 balance accrues $416.67 in interest, $41.67 in MIP, and a $30.00 servicing fee, bringing the ending balance to $100,488.34.
In the second month, these charges are calculated on the new, higher balance, resulting in slightly larger charges of $418.70 for interest and $41.87 for MIP, which brings the total balance to $100,978.91.
By the third month, the balance of $100,978.91 accrues $420.75 in interest and $42.07 in MIP, growing the total loan balance to $101,471.73.

As this example illustrates, the loan balance increases each month from the addition of interest, MIP, and fees. Furthermore, the amount of interest and MIP charged each month also increases slightly, because it is calculated on the new, higher balance from the previous month. This demonstrates the power of compounding, which is the core financial engine of a HECM loan.

What to Do if You Find an Error on Your Statement

While most servicers are accurate, errors can happen, so it is vital to review your statement carefully. Being a vigilant consumer and knowing what to look for can protect your financial interests and your home equity. If you find something that doesn’t look right, federal regulations provide a clear process for disputing it.

Common Red Flags to Watch For

Unexplained or Unauthorized Fees: Scrutinize the transaction history for any fees you don’t recognize, such as property inspection fees that were not warranted or servicing fees that were not in your original loan agreement.
Incorrect Interest Rate Calculation: If you have an adjustable-rate loan, you can verify the interest rate by checking the current index value and adding your lender’s margin, which is fixed and found in your loan agreement.
Transaction Errors: Carefully compare any draws or advances listed on the statement with your own records to ensure the dates and amounts are correct.

A Step-by-Step Guide to Disputing Errors

If you believe there is an error on your statement, your first step should always be to call the customer service number listed on your mortgage statement. While a phone call is a good starting point, you must follow up in writing to formally protect your rights.

Next, draft a formal “Notice of Error” letter that includes your full name, property address, and HECM account number. Clearly describe the specific error you are disputing, including dates and dollar amounts, and send it via certified mail to the servicer’s designated address for disputes.

Under federal law, your servicer must acknowledge receipt of your letter within five business days. They then generally have 30 business days to either correct the error or provide a written explanation of why they believe no error occurred. If the servicer does not respond or you are unsatisfied with their explanation, you can escalate the issue by filing a formal complaint with the Consumer Financial Protection Bureau (CFPB) or seeking help from a HUD-approved housing counselor.

FAQs

Why did my total loan balance go up this year even though I didn’t take any money out?

Your loan balance increases every month, even without new draws, because of compounding charges. Each month, interest and the annual Mortgage Insurance Premium (MIP) are calculated on your total outstanding balance and added to it. If applicable, a monthly servicing fee is also added, causing the total amount you owe to grow continuously.

What is the ‘Principal Limit’ on my statement, and why is it different from my loan balance?

The Principal Limit (PL) represents your total borrowing power, or the maximum amount of money you can receive from the HECM, as calculated when your loan first closed. It is not what you currently owe. The loan balance is the portion of the Principal Limit you have used, plus all accrued interest, MIP, and fees to date.

My statement shows a ‘Growth of Principal Limit.’ What does this mean?

This powerful feature applies to HECMs with an adjustable interest rate and a line of credit. It means your total borrowing capacity—both the money you’ve used and the line of credit you haven’t—grows over time. Crucially, this growth is contractual and is not dependent on your home’s market value increasing.

What are the ‘MIP’ charges on my statement?

MIP stands for Mortgage Insurance Premium, a requirement for all FHA-insured HECM loans. These premiums protect the lender against loss if your loan balance is higher than your home’s value when the loan ends; they do not protect you. Your statement reflects the ongoing Annual MIP, which is calculated at 0.5% of the outstanding loan balance and is added to what you owe each month.

My statement lists a ‘set-aside.’ Why can’t I access that money?

A set-aside is a portion of your loan proceeds that is reserved for a specific purpose and is not available for you to draw as cash. The most common type is a Life Expectancy Set-Aside (LESA), where the servicer holds funds to make property tax and homeowner’s insurance payments on your behalf. Another type is a Repair Set-Aside, which holds funds to pay for required home repairs after closing.

How can I check if the interest charges on my statement are correct?

If you have an adjustable-rate loan, you can verify the interest rate calculation. Your statement should show the current rate, which is composed of a variable index plus a fixed lender’s margin. You can find your specific margin in your original loan agreement and add it to the current public value of the index to confirm the rate is accurate.

What is the purpose of the ‘Transaction History’ section?

The transaction history is your financial diary for the past year, providing a detailed, month-by-month breakdown of all activity. It is the most granular part of the statement and is the best place to check for accuracy. In it, you can verify any cash draws you made and see exactly how much was added each month for interest, MIP, and fees.

I made a voluntary prepayment. How can I confirm it was applied correctly on my statement?

If you have made a voluntary prepayment, you should carefully review the transaction history section for the month you made the payment. Confirm that the payment was credited correctly. The statement should clearly show that your outstanding loan balance was reduced by the proper amount.

Why was I charged a ‘property inspection’ fee?

A property inspection fee may be charged if your servicer needs to verify that you are still living in the home as your principal residence. This most commonly occurs if you fail to sign and return your Annual Occupancy Certification form on time. The cost of this inspection is then added to your loan balance.

What is the first thing I should do if I find an error in my statement?

Your first step should be to call the customer service number listed on your mortgage statement to explain the issue and ask for clarification. However, to formally protect your rights under federal law, you should always follow up this call by sending a written “Notice of Error” via certified mail. The letter should clearly describe the error and be sent to the servicer’s designated address for disputes.

Conclusion

Your HECM annual statement is not a bill to be paid, but a financial report. By learning to read its sections, you can track how you are leveraging your home’s equity, monitor the loan’s performance, and understand your financial position over time.

Marimark Mortgage

Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.

We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.

To get started with a mortgage to buy your next home, please fill out our Quick Mortgage Application, or contact us direct.

Resources for Additional Research

Home Equity Conversion Mortgages for Seniors (HUD)
Reverse mortgage loans (CFPB)
Reverse Mortgages (FTC)
Reverse Mortgage (Marimark Mortgage)
How Does a Reverse Mortgage Work? (Marimark Mortgage)

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