Understand exactly how compound interest works on reverse mortgages. See real calculations, long-term projections, and the impact on your equity over time.
Compound interest is "interest on interest." With reverse mortgages, you don't make monthly payments, so interest is added to your loan balance each year. The next year, you pay interest on both the original loan AND the previous year's interest.
Year 1: $100,000 loan @ 7% = $7,000 interest
New balance: $107,000
Year 2: $107,000 @ 7% = $7,490 interest
New balance: $114,490
Year 3: $114,490 @ 7% = $8,014 interest
Notice how the interest amount increases each year, even though the interest rate stays the same. This accelerating growth is the power (and risk) of compound interest.
*Assumes initial house value of $800,000 growing at 3% annually
| Year | Loan Balance | Interest Added | Total Interest | House Value* | Remaining Equity |
|---|---|---|---|---|---|
| 0 | $200,000 | $0 | $0 | $800,000 | $600,000 |
| 1 | $215,000 | $15,000 | $15,000 | $824,000 | $609,000 |
| 2 | $231,125 | $16,125 | $31,125 | $848,720 | $617,595 |
| 3 | $248,459 | $17,334 | $48,459 | $874,182 | $625,723 |
| 4 | $267,094 | $18,634 | $67,094 | $900,407 | $633,313 |
| 5 | $287,126 | $20,032 | $87,126 | $927,419 | $640,293 |
| 6 | $308,660 | $21,534 | $108,660 | $955,242 | $646,582 |
| 7 | $331,810 | $23,150 | $131,810 | $983,899 | $652,089 |
| 8 | $356,696 | $24,886 | $156,696 | $1,013,416 | $656,720 |
| 9 | $383,448 | $26,752 | $183,448 | $1,043,819 | $660,371 |
| 10 | $412,206 | $28,759 | $212,206 | $1,075,133 | $662,927 |
| Final (15) | $591,775 | - | $391,775 | $1,246,374 | $654,599 |
*House value assumes 3% annual growth from initial value of $800,000
Outcome: Despite the loan more than doubling, Margaret still has substantial equity due to strong house price growth. Her initial $450,000 equity became $580,000.
Outcome: The loan exceeded the home value, but the no-negative-equity guarantee means Robert's estate owes only the home's value ($1,077,000), not the full loan balance.
Outcome: Even after 18 years and nearly $800,000 in compound interest, the couple retained significant equity due to strong property appreciation.
Compound interest is a double-edged sword. While it allows you to access your home's equity without monthly payments, it can significantly erode that equity over time. The key factors are:
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