Reverse Mortgage Basics
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| Table A-1: Comparison of Typical “Forward” and Reverse Mortgages | ||
| Item | “Forward” Mortgages | Reverse Mortgage |
Purchase of loan |
to purchase a home |
to generate income |
Before closing borrower has… |
no equity in the home |
a lot of equity in the home |
At closing, borrower |
owes a lot, and has little equity |
owes very little, and has a lot of equity |
During the loan, borrower… |
makes monthly payments to the lender |
receives payments from the lender |
loan balance goes down |
loan balance rises |
|
equity grows |
equity declines |
|
At end of loan borrower… |
owes nothing |
owes substantial amount |
has substantial equity |
has much less, little, or no equity |
|
Type of Transaction (Summary) |
Falling Debt-Rising Equity |
Rising Debt-Falling Equity |
| Table A-2: Simplified* Reverse Mortgage Example | ||
Assumptions: |
||
Monthly Loan Advance |
$1,000 |
|
Monthly Interest Rate |
0.5% |
|
Original Home Value |
$200,000 |
|
Appreciation Rate |
4% per year |
|
| A | B | C | D | (D-C) | |
| End of Year | Principal Advances | Interest @ 0.5%/mo. | Loan Balance | Home Value | Home Equity |
| 1 | $12,000 | $397 | $12,397 | $208,000 | $195,602 |
| 2 | 24,000 | 1,559 | 25,559 | 216,320 | 190,760 |
| 3 | 36,000 | 3,532 | 39,532 | 224,872 | 185,339 |
| 4 | 48,000 | 6,368 | 54,368 | 233,971 | 179,602 |
| 5 | 60,000 | 10,118 | 70,118 | 243,330 | 173,211 |
| 6 | 72,000 | 14,840 | 86,840 | 253,063 | 166,222 |
| 7 | 84,000 | 20,594 | 104,594 | 263,186 | 158,591 |
| 8 | 96,000 | 27,442 | 123,442 | 273,713 | 150,270 |
| 9 | 108,000 | 35,453 | 143,453 | 284,662 | 141,208 |
| 10 | 120,000 | 44,698 | 164,698 | 296,048 | 131,349 |
*Illustrative example only; does not include loan closing costs and fees, or home selling costs.
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