Reverse Mortgage Interest
One important factor that is not often communicated clearly is how reverse mortgage interest is calculated. It is very important to understand how interest is calculated when considering whether it is a viable instrument for you or your family member. Another good overview is provided in reverse mortgages pros and cons.
Reverse mortgage interest is adjustable
Reverse mortgages most commonly have variable or adjustable interest rates. These rates adjust based on market conditions and interest rate index. Interest is calculated as a combination of the Index Base Rate, the lender’s margin and period rate adjustments. There is also a cap on interest rates to minimize the adjustment to the consumer.
Reverse mortgage interest compounds
The amount you will owe on your reverse mortgage does not remain constant based on what you have borrowed – it continues to increase over time. The increase is calculated as interest on the amount you have borrowed (on all amounts withdrawn, not including available funds remaining as a credit line). Interest is accrued interest will compound over the life of the loan. Before you get a reverse mortgage, make sure you analyze the total cost to you with your financial planner.
Reverse mortgage interest is not deductible
One very important note when comparing a reverse mortgage with your traditional or existing home mortgage is that the interest accrued in a reverse mortgage is not deductible until the loan is paid off. So using a reverse mortgage to pay off your current loan can create adverse results to seniors while they continue to live in their home. So it is important to consult your financial planner or accountant when weighing these options.
Get a FREE reverse mortgage guide to answer all of your questions and find out how much money you could qualify for.
NOTE: You should also understand the up-front costs associated with reverse mortgage fees before making a decision.
