Understanding the Reverse Mortgage Amortization Schedule
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.
What the schedule includes
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.
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.
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.
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 paying 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.