How do you calculate reverse mortgage amortization? Read here to determine how you can calculate your loan’s amortization!
One of the most confusing aspects of a reverse mortgage is how to calculate amortization. Since a reverse mortgage does not require monthly payments, its amortization schedule is unlike any other loan. Luckily, reverse mortgage amortization is quite simple to understand and calculate.
Understand it is Negative Amortization
The first step needed in how to calculate reverse mortgage amortization is to understand that it is actually amortizing negatively. Since the loan does not require monthly payment and it accrues interest monthly, the loan balance will continue to grow. This is unlike amortizing loans which are paid down each month. Due to the negative amortization aspect of a reverse mortgage, the borrower’s equity will decrease each month.
Gather Information
The next step needed in how to calculate reverse mortgage amortization is to gather all necessary information. To calculate the negative amortization of a reverse mortgage all you need your current interest rate and the current outstanding balance.
Calculate the Amortization
After gathering all necessary information the next step needed in how to calculate reverse mortgage amortization is to calculate the monthly amortization. To do this you need to take the interest rate, divide it by 12, and then multiply it by the principal balance. For example, if your balance was $200,000 and your interest rate was 6%, then your negative amortization would be $1,000. This is calculated as ((6% / 12) * $100,000) = $1,000). After the monthly amortization, your new loan balance will be $201,000.
Limit Negative Amortization
Luckily, there are ways to limit your negative amortization. The best way to limit your amortization is to opt for a line of credit as opposed to a lump sum payout. This will prevent you from paying interest on money before you absolutely need it.
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