What is an Amortization Schedule?
Once you have decided that a reverse mortgage is right for you, it’s important to look at the amortization schedule. A reverse mortgage amortization schedule is a document that will provide a best estimate of how the loan will hypothetically perform over time. The amortization schedule must use the rates and draw amounts available when you run the schedule to look forward to illustrate how the loan balance and the line of credit will fluctuate.
Therefore, a fixed rate loan with a one-time draw would have an accurate amortization schedule from the start because the rate never changes and the borrower receives all their funds from the start (with the only possible difference being if the borrower decides to voluntarily repay some or all of the money early or if the lender needed to advance funds such as would be the case if the lender had to pay taxes or insurance due to the borrowers’ failure to pay on time, etc.).
How interest rates affect amortization schedules
On the other hand, the line of credit amortization schedule is subject to change because reverse mortgage rates can change, the borrower can always draw additional funds as long as they are available and can make repayments if they so choose even though they are not required to do so for as long as they live in the home and pay their property charges in a timely manner.
Unlike a traditional loan, a reverse mortgage is a negatively amortizing loan—meaning the loan balance will grow as time passes assuming the borrowers choose to make no early payments. 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.
And on the line of credit, as long as there is money left unborrowed, that line of credit grows giving the borrower more money available at the same rate as the interest being charged plus the MIP accrual rate. This is important to note that the growth in the line is not interest you are earning but rather an increase in the funds available to you.
You do not accrue interest owed on the line that you do not use and if you never use the line or any portion of the growth in that line you never accrue any interest on it so it costs you nothing to have the funds available. However, it is a great feature to have later in the life of the loan when you may need more money.
Your Loan Officer will give you an amortization schedule that is based on the estimate of the value that you give them when you first begin to discuss your desire for a reverse mortgage. Your reverse mortgage counselor will either go over this schedule with you as well or may even print you another one that they provide from their calculators and it should mirror the one your lender gave you.
If it does not, it is because they are using different numbers such as the value or the interest rates because all the calculations are determined by the reverse mortgage calculator. If there is a large difference, you may wish to question the difference to be sure your lender or your counselor have the correct information (borrower’s ages, property value, existing loan amount to be paid with the reverse mortgage or interest rates).
After your appraisal has been completed, your documents including the amortization will be run again using the actual appraisal instead of just an estimate and you will see the actual numbers knowing what your appraiser determined for your home’s value.
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 does the amortization schedule include?
A basic amortization schedule will show the numbered years of the loan, the interest rate, interest accrued, loan balance and home equity. Reverse mortgage lenders will present this information in a table starting with the first year of the loan and the outstanding balance.
Year by year, assuming you enjoy the reverse mortgage as intended and make no payments, you will see the outstanding balance owed 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. Many figures in the schedule are estimates because they are based on future numbers that no one can know. The schedule uses 4% expected appreciation and in many areas property values rise well above this amount in many years.
According to Ownerly.com, the average appreciation for the last 25 years is 3.9% and that includes the period when the prices fell dramatically in 2008 and remained depressed for several years.
Also, since this article was originally written December of 2019, it does not include the double digit climb in values in 2020 and 2021. So, in some years it may not rise as much as much 4% or could be lower, but year over year, 4% appears to be a solid number on average.
Keep in mind that different areas are also more prone to rapid appreciation or slower growth and if you know that the area in which you live is one that never seems to rise as much, you can request that your amortization schedule be run with a lower expected rate of appreciation.
Adjustable-Rate Amortization Example
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. Here again, the schedule can only use known figures so if interest rates rise, the growth of the line will be higher than the amount shown on the schedule.
In the case of the same 77-year-old borrower and $500,000 home, the amortization schedule shows the initial line of credit at $232,379.59 and is expected to grow to $245,903after year one, and $308,340 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.
Fixed-Rate Amortization Example
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. For this example, a $500,000 home, a 77-year-old borrower may be able to borrow roughly $130,479.59. 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 $143,100. After year five, $183,114, 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. It will give you a good idea of what would be needed in order to keep the loan balance owed from growing.
However, you will receive a monthly statement from your loan servicer that will break down the amount accrued monthly that would allow you to know exactly what you would need to pay to keep the loan balance constant, shrinking or growing at a predetermined rate.
We also have an amortization table that we have developed that is and excel program that allows you to run different 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.
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