On a Reverse Mortgage does the interest accumulate on the unpaid balance at the same rate. If so, does that mean your paying interest on the compounded amount each month?
Updated for clarification: Added “Growth Factor” explanation so as not to be misleading in explaining the internals of the Reverse Program.
Yes. Interest compounds on the outstanding balance. If this were a traditional fully amortizing loan program that would be an immediate cause for concern given the finite level of equity in your home. Add on the fact that you never have to make a mortgage payment and now any rational person will immediately experiences a high level of insecurity with this program. The key is that HECM Reverse Mortgage is a negatively amortizing loan program but it’s not just the loan balance that grows. The program assumes a growth factor that incorporates your age and other factors that may incorporate a property variable related to property appreciation. This attractive feature over time allows you to access more and more of your perceived equity. As an example, if you opt for a tenured annuity like payment you will receive this payment for your life and the remaining life of the surviving co-borrower no matter how long they live and it will continue even if the aggregate payments exceed your property value. Now this is obviously not a characteristic of a thirty year loan that is tied into an amortization and an interest rate. Don’t try to compare a HECM Reverse Mortgage to a traditional mortgage. It’s a very different program and the key here is not to fear the rate but understand the mechanics. Learn more at Jefferson Mortgage Group LLC www.jeffersonreversemortgage.com
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