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Reverse Mortgage Interest Formula:
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Reverse mortgage interest is the cost of borrowing against your home equity in a reverse mortgage. Unlike traditional mortgages, interest accrues on the loan balance but is not paid monthly. Instead, it's added to the loan balance and paid when the loan becomes due.
The calculator uses the reverse mortgage interest formula:
Where:
Explanation: The formula calculates the monthly interest by taking the annual rate, dividing it by 12 to get the monthly rate, and multiplying it by the current loan balance.
Details: Understanding monthly interest accrual is crucial for reverse mortgage borrowers to comprehend how their loan balance grows over time and plan for eventual repayment.
Tips: Enter the current loan balance in dollars and the annual interest rate in decimal form (e.g., 0.05 for 5%). All values must be valid (balance > 0, rate between 0-1).
Q1: How is reverse mortgage interest different from traditional mortgage interest?
A: Reverse mortgage interest accrues but isn't paid monthly - it's added to the loan balance and paid when the loan becomes due, typically when the borrower moves out, sells the home, or passes away.
Q2: Can interest rates change on reverse mortgages?
A: Yes, most reverse mortgages have variable interest rates that can change over time based on market conditions and the specific loan terms.
Q3: How does compounding work with reverse mortgage interest?
A: Interest typically compounds monthly, meaning each month's interest is calculated on the previous month's balance including accrued interest.
Q4: Are there caps on reverse mortgage interest rates?
A: Most reverse mortgages have lifetime interest rate caps that limit how high the rate can go over the life of the loan.
Q5: How does interest affect the total loan balance?
A: Since interest accrues and compounds over time, it can significantly increase the total loan balance, especially over longer loan periods.