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Reverse Mortgage Amortization

Instead of taking out a loan and making monthly (or in some cases bimonthly) payments, a reverse mortgage provides you with money that does not have to be paid back until you no longer live in the home.

Many home owners choose not to make payments on their reverse mortgage. When this is coupled with accumulating interest, the amount owed on a reverse mortgage will increase over time. With a conventional mortgage, the balance decreases as the home owner makes payments.

The amortization schedule for reverse mortgages is configured differently than with a conventional mortgage.

Conventional mortgage amortization schedule:

The balance owed is calculated based on your original loan amount, interest rate and regular payments. Over time, the amount owed in interest plus principal will decrease until, eventually, you have a balance of zero.

Reverse mortgage amortization schedule:

This is calculated using the same factors but your balance will often  increase as the years go by.

In a reverse mortgage, the home owner can choose to receive:

  1. A lump sum of cash at closing
  2. Monthly payments from the lender
  3. A line of credit
  4. Any combination of these options

Regardless of the method chosen, the total sum owed will be greater than that of what you initially borrowed as interest is accrued over the time between when the funds are borrowed and when they are repaid.

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To give you a better idea of how it works, let’s use a hypothetical reverse mortgage loan:

Let’s say you took out a reverse mortgage at age 62 (the first year of eligibility) and opted to receive a lump sum advance of $100,000 to help pay for renovations to your home to make it more accessible as you age and to pay off some debts lowering your monthly obligations. The interest rate on this theoretical reverse mortgage is 5.000 percent. (This is not a quote on current interest rates, and simply an example for illustrative purposes. Mortgage rates change all the time. For current rates on a reverse mortgage loan contact an Alpha Reverse Mortgage Banker.) You own your home and make no monthly mortgage payments from this point forward (though you do continue to pay for insurance and property taxes and for upkeep of the home.)

Let’s also say, that you continue to live in your home for the next 25 years…

Initially your balance will be $100,000

Over time your balance will increase as interest charges are added. Going forward interest charges are accrued on both the original balance and the interest that has already been applied. Your Reverse Mortgage Banker from Alpha Mortgage can help you run the numbers with a reverse mortgage amortization calculator to see what the total amount owed would be after five years, ten years, and so on.

Protection by Payments:

Although you do not have to make payments on a reverse mortgage, there’s no rule that says you can’t. By making payments when you can afford to, you can lessen the interest accumulation.

Repaying the loan:

When it comes time for the loan to be repaid (in the event of the home owner’s death, or when they are no longer using the home as a primary residence) it’s not unusual for the property to be sold, and to repay the loan using the proceeds from the sale of the home. Whatever is left over goes to the home owners, or their estate or heirs.

If the home does not sell for an amount high enough to satisfy the outstanding balance, any losses are absorbed by the federal government through an insurance fund designed for this purpose. Contrary to popular belief, the lender will not go after the home owner’s heirs or seize any other property to settle the outstanding balance. This is what is called a non-recourse loan.

Learn more about how people are using home equity conversion mortgages for purchasing homes:

Please keep in mind that the reverse mortgage industry is constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.