Certified Residential Appraiser Practice Exam

What happens to the balance of a reverse mortgage loan over time?

1. It remains static

2. It decreases

3. It increases

4. It fluctuates

The correct answer is: It increases

The balance of a reverse mortgage loan increases over time, making it the correct answer. This occurs because, with a reverse mortgage, the borrower receives funds from the lender, which are usually disbursed as a lump sum, line of credit, or monthly payments. Unlike a traditional mortgage where the borrower pays down the principal and interest, in a reverse mortgage, the interest continues to accrue on the unpaid balance, which includes the original mortgage amount plus the accumulated interest. As time progresses, the balance grows due to the accumulation of interest and any additional withdrawals taken by the borrower. This means that the amount owed against the home increases until the loan becomes due, typically when the borrower sells the home, moves out, or passes away. Understanding how the balance changes is crucial for borrowers considering this option, as it impacts their equity and future financial options concerning their property.