I am curious about the math of reverse mortgages. I have done a google search and looked at some sites, but I cannot find anything that makes it clear to me.
Disclaimer: I am __not__ considering a reverse mortgage. So I do not need advice. This is really just an academic exercise for me.
mirrors that lenders employ to determine the parameters of a reverse mortgage. Let's not go there.
Assume that the lender has determined that the home equity is $500,000, the applicable life expectancy(s) is 30 years, and the lender is willing to pay interest at 5%.
In Excel terms, would the nominal monthly annuity (paid by the lender to me) be simply:
=pmt(5%/12, 30*12, -500000)
And if I dispose of the property (or die) in 15 years, would the equity to be paid to the lender be:
P0000 - fv(5%/12, 15*12, pmt, -500000)
In any case, how is the lump sum payment (to me) from the lender determined?
I presume it's the PV of something. But what?
I have a lot of other questions that go beyond the math. For example, it's not clear to me why a lender would offer a reverse mortgage. How is the lender making money in the meantime before the sale of the property?
Presumably, that "cost of capital" is factored into how the lender chooses that the interest rate that the lender offers. But even that math is less clear to me for reverse mortgages than for so-called "forward" mortgages. I stumbled across an excellent book once that explained all this. But, sigh, I don't remember the book title.
Anyway, these questions make me suspect that I have the wrong model for the reverse mortgage, in the first place.
Any help with understanding the mechanics of reverse mortages from both sides would be appreciated.