If you've ever borrowed with a traditional “forward” mortgage, you have probably dealt with the Good Faith Estimate (GFE) and Truth-in-Lending (TIL) disclosures, and have some understanding of the Annual Percentage Rate (APR). You’re okay with shopping for an ordinary mortgage. When it comes to reverse mortgage, however, few people have even heard of the TALC disclosure, and almost no one understands it.
Talking the TALC
Reverse mortgage lenders must provide in writing a projected total cost of the reverse loan at least three business days before closing. This Total Annual Loan Cost, or TALC, is required in addition to other mortgage disclosures because it would otherwise be very hard to compare quotes from reverse mortgage lenders.
TALC vs APR
The term "total annual loan cost rate" was coined to help consumers understand that it isn’t the same as the more familiar APR – that it more accurately captures the true cost of a reverse mortgage year after year. Why can’t you just use the APR? Because you don’t really know how much you’re borrowing – it depends on how you choose to take your proceeds, what happens to interest rates, and how long you keep the loan. If you don't make monthly mortgage payments, your balance grows until the loan is ultimately paid off. This cost over time is shown as a TALC rate.
TALC disclosures must show rates based on at least nine scenarios. It’s up to you to decide which of those is most realistic for you, and use that scenario when comparing quotes for different reverse mortgage products.
Changes in term
APRs are calculated on the assumption that you’ll keep your loan for its entire term. But reverse mortgages don’t have a specific term, so TALC rates must be calculated based on three scenarios with three different loan terms: two years, the youngest borrower's life expectancy, and 1.4 times the youngest borrower's life expectancy. You can find life expectancy figures included in an appendix to Regulation Z. All reverse mortgage lenders must calculate the TALC the same way.
Changes in appreciation
Some reverse mortgages (but not FHA reverse mortgages called HECMs) include a shared equity plan, in which any property value increase during the time you have your loan must be shared with your lender. The potential appreciation that you’d pay a lender must also be considered in the TALC. In addition, nearly all reverse mortgages contain non-recourse clauses, which means that you can never owe more than your home's value even if it depreciates and / or you live longer than expected.
Because of those provisions, TALC rates must be disclosed assuming annual property appreciation rates of 0%, 4%, and 8%. The 4% rate comes from HUD's historical housing appreciation data. The 0% and 8% figures are included to help you understand the potential costs and benefits of different property appreciation rates. Check out this sample TALC from HECMcounselors.org at the end of this article: you can see that the lower the appreciation, the more likely it is that your loan balance could exceed your home’s value, and the lower your TALC rate.
Changes over time
In addition, three scenarios show you how your costs change over time. The mortgage insurance is based on your home's value, not your loan amount, and a sizable premium is charged upfront (it’s much less for HECM Saver loans with their lower loan amounts). You may also pay upfront closing costs like origination fees. This means that if you only keep your reverse mortgage a couple of years, your costs as a percentage of what you borrow could be very high.
For example, if you pay out $10,000 in upfront costs expecting to get $1,000 a month until you die, but then have to move after only two years (collecting only $24,000), you end up paying fees equal to nearly half of your loan proceeds.
But if you pay that same $10,000 upfront and take $1,000 a month for twenty years, you collect $240,000 and your upfront fees come to about four percent of the amount borrowed. Even better, if your property appreciates less than expected, and is only worth $200,000 at the time your mortgage comes due, you're way ahead of the game (taking $240,000 and paying back only $200,000). So the total cost of borrowing depends in part on factors you have little control over.
TALC costs disclosed
The projected total cost of credit must reflect all costs and charges to you, including origination charges, reverse mortgage interest, and mortgage insurance. Reverse loans require almost no out-of-pocket expense, and all advances made for your benefit must be reflected in the projected TALC. Also included is any shared appreciation or equity that the creditor is entitled to receive as well as any limitation on your liability.
In addition to the written projection of the TALC, lenders must provide the following information:
- A statement that you are not obligated to complete the reverse mortgage transaction because you have received the disclosures or have signed an application;
- A list and explanation of loan terms and charges, the age of the youngest borrower, and the appraised property value;
- An explanation of the table of total annual loan cost rates.
The disclosures must be provided to you at least three business days before closing escrow and funding the loan.
Shopping for your reverse mortgage
Shopping for a reverse mortgage isn’t that different from shopping for a traditional forward mortgage.
- Get TALCs from several reverse mortgage lenders.
- Look at FHA Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages as well.
- Decide which TALC scenario most likely applies to you (your time frame and how you plan to take your proceeds), and choose the option with the lowest TALC for your scenario.
- Even if you go with a proprietary reverse mortgage, consider obtaining reverse mortgage counseling from a HUD-approved service before closing your loan.