Tips to help you clearly understand what a reverse mortgage is and answer the question “How do I compute the interest on a reverse mortgage?”
What is a reverse mortgage?
Most people have no idea exactly what a reverse mortgage is, and will ask themselves “How do I compute the interest on a reverse mortgage?” It is not selling your home to the government and after you die, your house will not go directly to the government. What it is is a loan against the equity in your house, and you would keep the house if your heirs pay off the loan after moving or death.
If a reverse mortgage is a loan, then what are the rates, and how is the interest computed on a reverse mortgage?
Reverse mortgage loans generally have been at a variable rate, but since 2007, they have been available at fixed rates as well. When they are variable, a reverse mortgage is dependent upon the current T-Bill rate, but usually will be between 3% and 5%. If your reverse mortgage is a Single Purpose Reverse Mortgage, which is taken for repairs to the home, your rate will be lower than a Home Equity Reverse Mortgage.
When you find out what the rate is, that’s the first step in figuring out “How do I compute the interest on a reverse mortgage?”, as it’s computed on a monthly basis. All you have to do is take the current rate of your reverse mortgage, divide by 100, then divide by 12, getting your monthly rate, then multiply it by the monthly payment.
Are your interest payments due right away, and can they come after me even after I surrender the house?
Most people don’t think about this because interest payments are not due as long as you are living in the house, rather the interest charges are accrued monthly and carried forward to a balance at the end. A reverse mortgage first pays off any existing loans you have in the house, then establishes a line of credit. The upside to this is that a reverse mortgage is a non-recourse loan. If you borrow more than the house is worth or the value of the home drops, you can simply opt to surrender the house and the loan company cannot come after you.
What do I do if I need to know more?
Be sure to inquire with a reverse mortgage company for all the details and interest rates, and don’t be afraid to ask questions if you’re lost. Before making a loan of this magnitude, be sure you understand clearly what your mortgage lender is saying and all the costs and fees associated are in plain text.
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