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Understanding the Reverse Mortgage Amortization Schedule

March 16th, 2012
     

Once you have decided that a reverse mortgage is right for you, it’s important to look at the amortization schedule: a document that will provide a best estimate of how the loan could grow over time.

Unlike a traditional loan, a reverse mortgage is a negative amortized loan—meaning the loan balance will grow as time passes. The amortization schedule provides a summary of how the interest may accrue, any available credit line and remaining home equity year-by-year over the course of the loan.

You’ll first get the schedule when the loan estimate is made. Then, after going through reverse mortgage counseling and receiving your home appraisal, you’ll see the document once more.

Finally, it’s one of the documents the borrower will sign at the loan closing, ensuring that he or she understands how the loan interest will accumulate.

What the schedule includes

A basic amortization schedule will show the numbered years of the loan, the interest rate, interest accrued, loan balance and home equity.

Your reverse mortgage lender will present this information in a table starting with the first year of the loan and the outstanding balance. Year by year, you will see the outstanding balance increase to include interest as it accrues. You’ll also see the amount of home equity you have in the home on day one, and the expected home equity on an annual basis.

If you have a line of credit as a component of the loan, or if you receive regular scheduled payments, those will also be shown in the amortization schedule.

The amount of home equity depends on the property value, which can rise or fall over time.

In an adjustable rate reverse mortgage including a line of credit, the amortization schedule will show the expected credit line growth over time and factors in the adjustable rate.

In the case of the same 77-year-old borrower and $500,000 home with the same loan amount, the amortization schedule shows the initial line of credit at $280,098 is expected to grow to  $296,840 after year one, and $374,442 after year five, if the funds are left in the credit line.

As the funds remain in the credit line, the home equity is expected to appreciate steadily over the course of the loan. Read more about the credit line growth here.

Amortization Schedule Illustrating Credit Line Growth

 

In a traditional fixed rate reverse mortgage, you will see the initial loan balance along with the interest rate, any closing costs that were financed into the loan closing and the annual mortgage insurance premium.

 

Amortization Schedule Illustrating Fixed Rate

 

For this example above, a $500,000 home, a 77-year-old borrower may be able to borrow roughly $284,500. That amount, minus any upfront fees will determine the initial draw, in this case, $282,598.

Over time, the loan balance will increase and home equity will change, depending on the value of the property. After year one, according to the table, the loan balance will be $300,548. After year five, $374,318, and so on. As interest and the mortgage insurance, which is based on the loan amount, increase over time, so does the loan balance.

The Amortization schedule is also useful for those looking to make repayments on the reverse mortgage. If you intend on taking a reverse mortgage and repaying the interest each month to keep your mortgage balance from negatively amortizing you can add the interest plus mortgage insurance  and divide by 12. The total monthly interest & insurance in this scenario would be $1,303.95 - (4.250 + 1.250% = 5.50% /12)

Understanding the numbers

The amortization schedule can look complicated as it is a snapshot of your loan over a number of years to include all loan components. This is another reason you’ll want to work with an experienced professional who can walk you through the numbers in detail.

If you would like us to prepare custom amortization schedules feel free to call us at (800) 565-1722, or use our free calculator which includes interest rates, closing costs, and amortization examples.

By Cliff Auerswald – Add me to your circles

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