WHAT IS AN AMORTIZATION SCHEDULE?
Once you have decided that a reverse mortgage is right for you, looking at the amortization schedule is essential. A reverse mortgage amortization schedule is a document that will provide the 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 illustrating 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 because the rate never changes.
The borrower receives all their funds from the start (with the only possible difference being if the borrower decides to repay some or all of the money early voluntarily or if the lender needs to advance funds, such as would be the case if the lender had to pay taxes or insurance due to the borrower’s 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 summarizes how the interest may accrue, any available credit line, and remaining home equity year-by-year throughout the loan.
And on the line of credit, as long as money is 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 available funds.
You do not accrue interest owed on the line you do not use. If you never use the line or any portion of the growth in that line, you never accrue any interest on it. Hence, 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.
When you first begin to discuss your desire for a reverse mortgage, your loan officer will give you an amortization schedule based on the estimate of the value you provide them. Your reverse mortgage counselor will either go over this schedule with you or may even print you another one they provide from their calculators, and it should mirror the one your lender gave you.
If it does not, they are using different numbers, such as the value of the interest rates, because the reverse mortgage calculator determines all the calculations. If there is a significant difference, you may question the difference to be sure your lender or your counselor has the correct information (borrower’s age, property value, existing loan amount to be paid with the reverse mortgage or interest rates).
After completing your appraisal, your documents, including the amortization, will be rerun using the actual appraisal instead of just an estimate. 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 they understand 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 an 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.
If you have a line of credit as a component of the loan or receive regularly 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 a 4% expected appreciation, and property values have risen well above this amount in many years in many areas.
According to Ownerly.com, the average appreciation for the last 25 years is 3.9%, including when the prices fell dramatically in 2008 and remained depressed for several years.
Also, since this article was written initially in December 2019, it does not include the double-digit climb in values in 2020 and 2021. So, in some years, it may rise less than 4% or lower, but year over year, 4% is a solid number on average.
Remember that different areas are also more prone to rapid appreciation or slower growth. 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. Again, the schedule can only use known figures, so if interest rates rise, the line’s growth will be higher than the amount shown.
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. If the funds are left in the credit line, it is expected to grow to $245,903 after year one and $308,340 after year five.
As the funds remain in the credit line, the home equity is expected to appreciate steadily throughout 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, interest rate, any closing costs 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 property’s value. For this example, in a $500,000 home, a 77-year-old borrower can borrow roughly $130,479.59.
As interest and mortgage insurance increase, so does the loan balance. After year one, according to the table, the loan balance will be $143,100 after year five, $183,114, and so on. The Amortization schedule is also helpful for those looking to repay the reverse mortgage. It will give you a good idea of what would be needed 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, allowing you to know exactly what you 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 an 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)
How is a reverse mortgage amortized?
Do reverse mortgages have negative amortization?
Is negative amortization a home bad thing?
How is interest calculated on a reverse mortgage?
Are reverse mortgage amortization schedules customizable for hypothetical scenarios?
UNDERSTANDING THE NUMBERS
The amortization schedule can look complicated as it is a snapshot of your loan over several years to include all loan components. This is another reason you’ll want to work with an experienced reverse mortgage lender who can walk you through the numbers in detail.
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