A reverse mortgage and a family loan can put the same amount of cash into a parent's hands, but the fees behind them are not close. A commercial reverse mortgage, known as a HECM, charges an upfront mortgage insurance premium equal to 2% of the home's full value, plus an origination fee of up to $6,000, before your parent spends a single dollar of it. A family loan, documented as a private note between an adult child and a parent, typically costs a few hundred dollars to set up, and any interest paid stays inside the family instead of going to a lender.
The trade-off is real. A HECM comes with FHA insurance and a federally guaranteed line of credit that can't be canceled. A family loan depends entirely on your own finances holding up for years, maybe decades. Below is a side-by-side comparison using verified 2026 numbers, plus what each option actually protects you against.
How Does a Reverse Mortgage (HECM) Work, and What Does It Cost?
A Home Equity Conversion Mortgage, the FHA-insured reverse mortgage almost everyone means when they say "reverse mortgage," lets a homeowner age 62 or older borrow against their equity without making monthly payments. The loan comes due when the borrower sells, moves out permanently, or dies. Because it's a nonrecourse loan, neither your parent nor their heirs will ever owe more than the home is worth, even if the balance grows past the sale price, according to the Consumer Financial Protection Bureau.
The costs are where it gets expensive:
- Upfront mortgage insurance premium (MIP): 2% of the home's Maximum Claim Amount, which is the lesser of the appraised value or the FHA lending limit.
- 2026 HECM lending limit: $1,249,125, per HUD's Mortgagee Letter 2025-22.
- Origination fee: the greater of $2,500 or 2% of the first $200,000 of home value plus 1% of the amount above that, capped at $6,000.
- Annual MIP: 0.5% of the outstanding balance every year, for as long as the loan is open.
- Third-party closing costs: appraisal, title work, HUD-mandated counseling, and recording fees that typically bring the total closing cost to 3% to 5% of the home's value.
Most of this gets financed into the loan rather than paid out of pocket, but that's not really a relief. It means the fees start accruing interest immediately and eat into the equity your parent was trying to access in the first place.
What Does a Family Loan Version Look Like?
The alternative is simpler on paper: an adult child, or several siblings pooling funds, lends the parent money directly. Instead of FHA underwriting, the family writes a promissory note. Instead of MIP, there's no insurance at all, just the risk that the lender is willing to carry.
A few structural choices matter:
- Secured or unsecured. For larger amounts, recording a deed of trust against the home gives the family lender some priority if the parent's estate has other creditors later.
- Interest rate. To avoid the IRS treating the loan as partly a gift with imputed interest under Section 7872, the note needs to charge at least the Applicable Federal Rate in effect when the loan is made. For a loan expected to run nine years or longer, that's the long-term AFR, 5.12% annually as of September 2026.
- Repayment structure. Interest can be paid currently, or it can accrue and compound until the home sells, mimicking how a HECM balance grows.
- Funding source. If you don't have the cash sitting in savings, some families use their own home equity through a HELOC to fund the loan, though that adds its own interest cost on your side of the ledger.
How Much Does It Actually Cost to Access $150,000 of Home Equity?
Here's a worked example. A parent's home is worth $350,000, owned free and clear, and they need $150,000 for medical bills and in-home care over the next several years.
| Reverse Mortgage (HECM) | Family Loan | |
|---|---|---|
| Upfront MIP | 2% x $350,000 = $7,000 | None |
| Origination fee | 2% x $200,000 + 1% x $150,000 = $5,500 | None |
| Third-party closing costs | Roughly $2,000 (appraisal, title, counseling, recording) | $500 to $1,500 (attorney, recording a lien) |
| Annual ongoing cost | 0.5% MIP plus the lender's variable interest rate | AFR interest only, 5.12% in this example |
| Total to open | Roughly $14,000 to $15,000 | Roughly $500 to $1,500 |
| Who keeps the interest | The lender and the FHA insurance fund | Stays inside the family |
That's a gap of roughly $12,000 to $13,000 in setup costs alone, before either loan has actually delivered a dollar of the $150,000 your parent needs.
Why Does a Small Need Get Punished the Hardest?
Here's the detail most comparisons skip: the upfront MIP and origination fee are calculated against the home's full appraised value, not against the amount your parent actually wants to borrow. A parent who needs only $40,000 for a new roof and a used car pays the same $7,000 MIP on a $350,000 home as a parent drawing the full $150,000. The fee doesn't scale down with a smaller need. It only scales with the house.
A family loan doesn't have that problem. Setup costs are tied to the size and complexity of the note itself, so a $40,000 loan costs about the same few hundred dollars to document as a $150,000 one. If the actual need is modest, that asymmetry alone can make a family loan the obvious choice.
What Do You Give Up When You Skip the Bank?
None of this makes a family loan free of risk. A HECM's biggest selling point isn't the interest rate, it's the guarantee behind it.
- No non-recourse protection by default. Unless a family note is specifically drafted to cap the parent's liability at the home's sale price, a family loan doesn't automatically carry the same protection an FHA-insured HECM does.
- The lender's own life gets in the way. Nolo has pointed out that a family member's job loss, divorce, or financial setback can leave a parent short on funds they were counting on, something an FHA-backed line of credit can't do to them (see Nolo's guide to family reverse mortgages).
- No guaranteed growth feature. A HECM line of credit grows over time regardless of home values; a family lender can't promise that if their own finances change.
- Scrutiny from other relatives. A large loan against a parent's biggest asset is exactly the kind of transaction siblings challenge later, either as unfair favoritism or, in the worst cases, as financial exploitation of an aging parent.
How Do You Structure a Family Loan So It Holds Up?
If the numbers point toward a family loan, treat it like the six-figure transaction it is:
- Put it in writing. A signed promissory note with a stated rate, term, and repayment plan, not a verbal understanding.
- Charge at least the AFR. Check the current IRS minimum rate every month you originate or restructure the note, since it changes.
- Record a lien if the amount justifies it. This protects the family lender's claim and creates a paper trail that isn't easy to dispute later.
- Document capacity and consent clearly, especially if the parent has any degree of cognitive decline. Courts and family members apply real tests to decide whether a transaction like this was a genuine loan or exploitation, and you want to pass that test before it's ever asked (see the bona fide loan test for elder financial abuse cases).
- Check the Medicaid angle first if a nursing home stay within five years is a realistic possibility. A poorly timed transfer or loan involving a parent's home can trigger the Medicaid look-back period and delay benefits.
- Track it properly. Keep a running record of the balance, accrued interest, and any payments, the same way you would for any other family loan.
This is a lot to get right, and none of it is tax or legal advice. Reverse mortgage terms, IRS imputed-interest rules, and Medicaid look-back periods vary by state and change from year to year. Talk with an elder law attorney, a CPA, or a HUD-approved reverse mortgage counselor before either side commits real money.
When Does the Bank Actually Win?
A family loan isn't automatically the better answer. A commercial HECM makes more sense when:
- No relative has $50,000 to $200,000 available to lend without straining their own finances.
- Your parent wants the ironclad, federally insured protection and doesn't want to owe their own children money.
- Family relationships are strained enough that a formal bank product avoids years of resentment or suspicion.
- Your parent is likely to need Medicaid soon and wants to avoid any transaction that looks like an intra-family transfer.
How Do You Actually Decide Between the Two?
Start by asking three questions: How much does your parent actually need, not how much their home is worth? Does a family member have that amount available without disrupting their own retirement or emergency savings? And can the family document the loan well enough to survive scrutiny from other relatives, Medicaid, or the IRS? If the answer to the second and third questions is yes, the math in this article says a family loan almost always costs less to set up. If either answer is no, the HECM's insurance and guarantees are worth paying for. For the broader framework on whether lending to family makes sense at all, see our complete decision guide and our notes on lending to aging parents specifically.
If your family lands on a private loan, you can create a free loan agreement in minutes and then track the balance, accrued interest, and payoff progress the same way a bank would, without the bank's fees.
