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HP Forum Archive 14

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Reverse Mortgage Calculations
Message #1 Posted by Bill Beall on 4 Mar 2004, 2:36 p.m.

Greetings! -

I'd like to learn how to properly verify a term of a "reverse morgage" calculation. If I may provide an example - I know: the monthly advance to the consumer is $492.51 and that the total of consumer's loan cost is $4,500, the contract interest rate is 9.0%, and the estimated time of repayment is 10 years (based on life expectancy at age 78. I also know that the appraised value of the dwelling is $100,000 and that the assumed dwelling appreciation rate is 8%. How do I verify using a programmable HP 12C that the Total-annual-loan-cost rate = 10.87%. In other other words, can some provide me with the keystrokes?

Thanks, Willing To Learn

Edited: 4 Mar 2004, 2:40 p.m.

Re: Reverse Mortgage Calculations
Message #2 Posted by kw on 4 Mar 2004, 7:20 p.m.,
in response to message #1 by Bill Beall

In its basic form this is a simple TVM calculation. Assuming monthly compounding and END payment mode, input the following and solve for i:

PV = 95500 (that's 100,000 minus the 4500 fee) PMT = -448.18 (that's 492.51 minus the 9% fee) FV = 0 (equity is depleted) N = 120 (number of monthly payments you receive)

You get i = -0.87%. Multiply by 12 to get an yearly depletion rate of 10.44%. This is what you call the Total-annual-loan-cost rate.

The quote you were given is slightly higher. Clearly, you need to know the fine details (compounding frequency, how the payment of fees is structured, rounding method used by the lender, etc.) in order to come up with an exact match.

Re: Reverse Mortgage Calculations
Message #3 Posted by bill platt on 5 Mar 2004, 10:08 a.m.,
in response to message #2 by kw

This seems like a VERY bad deal! Like, 120 * $448.18 = 53,781.60. If your house appreciated 8% over the 10 years, then it would be worth $108,000, so you are only getting 1/2 of the house's value. (In the long term, houses do not appreaciate 8% per annum, but if it was 8% per annum, then your 100,000 house would be projected to be worth $215,892 in 10 years, which would mean you would be getting only 24.9% of your house's projected value).

Seems like a great deal for the bank--they pay only $53,781.60 to aquire a property worth $108,000 or more. Or, taking the time value of money into account: if money is worth 6% per year (what they get for a mortgage), then the bank will have spent in principal and "lost" interest, $73,937. So, at the end of 10 years, the bank sells the house for $108,000 and makes (in real terms) $34K!

Am I right, or have I completely missed something here?

What if you "overstay your visit" (live longer than 10 years). Do you get to live in your house, do you keep receiving payments, etc?

Edited: 5 Mar 2004, 10:10 a.m.

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