Question

Assume you take out a $300,000 reverse mortgage loan, under the FHA program, for a term of 8 years at 6.5% annually. The reverse mortgage makes monthly annuity payments. Find the monthly payment you receive.

Monthly payment: __________________________

Answer 1

The monthly payment is computed as shown below:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

r is computed as follows:

= 0.065 / 12 (Since payments are monthly, hence divided by 12)

= 0.005416667

n is computed as follows:

= 8 x 12 (Since payments are monthly, hence multiplied by 12)

= 96

So, the monthly payment will be as follows:

$ 300,000 = Monthly payment x [ (1 - 1 / (1 + 0.005416667)⁹⁶ ) / 0.005416667 ]

$ 300,000 = Monthly payment x 74.70361287

Monthly payment = $ 4,015.87 Approximately