How is the interest accrued on a reverse mortgage? Read here to understand how the interest accrues.
One of the largest concerns regarding a reverse mortgage is how quickly the interest accrues. Luckily, the way the interest accrues is quite simple to understand.
Interest Accrues Monthly
On a reverser mortgage, interest is accrued monthly. To calculate the interest that will accrue each month, all you need to know is your interest rate and your outstanding principal balance. If your principal balance is $100,000 and your interest rate is 7%, then you will accrue $583 in interest. To calculate this take the interest rate, divide it by 12 and then multiply it by the principal balance. For example (.07 / 12 * $100,000 = $583). At the end of the month, your principal balance will now be $100,583.
Interest Accrues Exponentially
On a reverse mortgage, mortgage interest accrues exponentially because the principal balance is not paid down. Using the example from above, since after the first month the principal balance is increased to $100,583, the second month interest will be $587. Interest on a reverse mortgage accrues quite quickly. After three years, the $100,000 reverse mortgage will have accrued $23,000 in interest. After ten years, the loan will have accrued $100,000 in interest.
Ways to Limit Interest Accrual
While a reverse mortgage accrues interest exponentially, there are various ways to limit the level of interest accrual. The best way limit the amount of interest accrual is to withdraw funds as slowly as possible. To do this you can either elect to get a monthly payout from the reverse mortgage lender or a line of credit. The line of credit will allow you to withdraw the least amount possible each month and will therefore limit the amount of reverse mortgage interest that accrues.
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