If you've taken out a traditional mortgage, you have probably familiarized yourself with the required Good Faith Estimate (GFE) and Truth-in-Lending (TIL) statements, and understand what APR (Annual Percentage Rate) is. You likely know how to shop for a traditional mortgage. Reverse mortgages, however, are completely different animals, with their own disclosure: the Total Annual Loan Cost (TALC).
TALC: The reverse mortgage disclosure
Reverse mortgage lenders must provide in writing a projected total cost of the reverse loan to you. The TALC is required in addition to other mortgage disclosures because it would otherwise be very difficult to compare reverse mortgage products and find the best mortgage rates for your situation.
TALC vs APR
Lenders must use the term "total annual loan cost rate" to avoid any confusion with APR and also to more accurately describe the true cost of a reverse mortgage year after year. With a traditional mortgage, you know how much you are borrowing. With a reverse mortgage, the amount you ultimately borrow depends on how you choose to take your proceeds, what happens to interest rates and how long you keep the loan. You don't make monthly mortgage payments, so your balance grows until the loan is ultimately paid off. This cost is shown as a TALC rate, which is generally higher than an APR and a more accurate assessment of reverse mortgage costs.
TALC rates must be calculated based on three scenarios, depicting 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.
Some reverse mortgages (but not FHA reverse mortgages, which are referred to as Home Equity Conversion Mortgages [HECMs]) include a shared appreciation scheme, in which any property value increase during the time you have your reverse mortgage must be shared with your lender. Nearly all reverse mortgages contain non-recourse clauses, which mean that you can never owe more than your home's value even if it depreciates and/or you live longer than expected. Because of that provision, TALC rates must also be disclosed assuming annual property appreciation rates of 0 percent, 4 percent and 8 percent. The 4 percent rate comes from HUD's historical housing appreciation data. The 0 percent and 8 percent figures are included to help you understand the potential costs and benefits of different property appreciation rates.
In addition, the three scenarios show you how your costs can change over time. The mortgage insurance is based on your home's value, not your loan amount, and a sizable premium is charged upfront (in addition to annual installments). The same goes for the upfront closing costs like origination fees. So if you only keep your mortgage for a couple of years because, say, you have to move due to health concerns, your reverse mortgage costs 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, plus interest on the $34,000 ($10,000 plus the $24,000 you collected).
Yet, if you spent that same $10,000 upfront and took $1,000 a month for 20 years, you collect $240,000 and your mortgage balance is $240,000 plus the fees and the interest. If your property is only worth $200,000 at the time your mortgage comes due, you're way ahead of the game. So the total cost of borrowing really depends on factors you may have little control over.
TALC costs and other disclosures
The projected total cost of your reverse mortgage must reflect all costs and charges to you, including origination charges, reverse mortgage interest and mortgage insurance. Reverse mortgages require almost no out-of-pocket charges, 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 the applicant is not obligated to complete the reverse mortgage transaction simply because he or she has received the disclosures or has signed an application for a reverse mortgage.
- A listing and explanation of loan terms and charges, the age of the youngest borrower and the appraised property value.
- An explanation of the table of TALC rates.
The disclosures must be provided to the consumer at least three business days before closing escrow and funding the loan.
How to shop for a reverse mortgage
Get TALCs from several reverse mortgage lenders. Look at FHA 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. In addition, explore other financing options (like home equity loans) that may accomplish the same goal but at a lower cost.
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