April 4, 2019 by HECM Pro
Most reverse mortgage borrowers are concerned mainly with how much they can get at the start of the loan. Yes, that is definitely important! However, it’s also important to see what could happen with the loan in the future.
What happens with the loan balance? How does the line of credit grow? How much equity will remain in the home?
These are all important questions that a reverse mortgage amortization schedule helps answer.
Getting an amortization schedule
If you’re already working with a lender, you can simply ask for an amortization schedule if they haven’t already provided one.
An amortization schedule will typically be provided by the lender along with three other documents:
- Reverse Mortgage Loan Comparison – A summary of the different reverse mortgage programs available.
- Total Annual Loan Cost – An estimate of the total cost of credit over time, taking into account closing costs, interest, and MIP.
- Closing Cost Worksheet – A breakdown of the closing costs involved in closing your loan.
If you’re not working with a lender, you can generate an estimated amortization schedule using our reverse mortgage calculator.
Reverse mortgage basics
A reverse mortgage is designed to allow seniors 62 or older to convert a portion of their home’s value into cash now and in the future.
The most popular reverse mortgage program in America today is the FHA-insured home equity conversion mortgage, or HECM. There are numerous reverse mortgage products available, but the HECM is by the far the most common.
A reverse mortgage works opposite a traditional mortgage. Instead of borrowing a set amount and paying it down, you start with little or no balance and gradually borrow against your equity over time.
You remain the owner of the home and are free to leave it to your heirs. Your heirs will inherit any equity remaining in the home.
The reverse mortgage is a home loan, which means it has an interest rate. If you choose not to make payments (which is the idea, right?), then interest simply accrues onto the loan balance. That means the loan balance increases over time.
Because the reverse mortgage is so different than what many people are used to, it’s important that borrowers be fully informed. They need to know how the program works and the impact it might have on their home equity in the future. That’s where the amortization schedule comes in.
What a reverse mortgage amortization schedule shows you
Keep in mind that a reverse mortgage amortization schedule is generated based on certain assumptions. As the old saying goes: your mileage may vary. Your real-world results could be radically different depending on how you use the reverse mortgage and how rates and home values change over time.
Most amortization schedules will show the following starting assumptions:
- Initial interest rate
- Estimated closing costs
- Starting loan balance
- Qualifying age
- Home value appreciation rate
The amortization schedule will also estimate the following over time:
- Annual interest accruals
- Annual MIP accruals
- Loan balance
- Available line of credit (variable-rate HECM only)
- Remaining equity in the home
Your remaining equity is usually calculated based on an assumed home appreciation rate. A lender will likely use an appreciation rate of 3% to 5%, which reflects the national average over several decades.
Obviously, actual appreciation rates can vary widely depending on where you are in the country. If you’re in the Midwest, appreciation rates tend to be low. If you’re in Silicon Valley, you may see much higher appreciation rates. If you’re working with a lender, make sure they’re assuming an appreciation rate realistic for your area.