If a HECM has an annual interest rate of 4% and a beginning loan balance of $200,000, the resulting increase in the loan balance for the year should be $8,000, right?  

Not quite. In fact, it’s actually $9,187.97.  

So where is the missing $1,187.97? 

1. Many borrowers forget that 0.5% is added for mortgage insurance. 1/12^th of this annual rate is used to calculate the monthly MIP charge. That charge is then added to the loan balance and remitted to FHA on the first of each month.
2. Also the HECM does not accrue simple interest . Rather HECMs compound interest and mortgage insurance monthly at 1/12^th the current interest rate and 1/12^th the MIP rate respectively. Consider the following monthly amortization: