Understanding the TALC on a Reverse Mortgage
When you’re shopping for a regular mortgage, the annual percentage rate (APR) is an important figure to consider. Reverse mortgages also have a stated interest rate, but a more revealing number is the total annual loan cost (TALC). Here is how TALC is calculated and what you can learn from it.
- Lenders must provide applicants for federally insured reverse mortgages with a total annual loan cost (TALC) table.
- The TALC is an estimate of the interest rate they would pay for the loan based on several different scenarios, including the duration of the loan and how much the home appreciates.
- Generally, the longer a reverse mortgage lasts, the less it will cost the borrower on an annual basis.
Reverse Mortgage Basics
A reverse mortgage allows homeowners to tap into their home equity to provide an income stream while still owning and living in their home. They can receive the money in the form of a lump sum, monthly payments, or a line of credit that they can draw on as needed. The loan typically doesn’t have to be paid back until the borrower dies, moves out, or sells the home.
The most common type of reverse mortgage is the home equity conversion mortgage (HECM). HECMs are insured by the Federal Housing Administration (FHA) and issued only by FHA-approved lenders. The FHA insurance, for which the borrower pays, protects the lender in case it is unable to recoup all of its money when the reverse mortgage comes to an end and must be paid off.
What Is Total Annual Loan Coast (TALC)?
Reverse mortgages are complicated and costly financial products. The law requires that lenders provide borrowers with a TALC disclosure form before they commit to the mortgage.
The TALC disclosure attempts to quantify the cost of the loan under several different scenarios. Reverse mortgage costs are impossible to predict with absolute certainty because no one knows exactly how long the borrower will live or be able to remain in the home.
How TALC Is Computed
The factors that go into computing a reverse mortgage’s TALC include:
- The age of the youngest borrower—All borrowers have to be at least age 62 to qualify for a HECM, but if a married couple are of different ages—75 and 70, say—it is the younger spouse whose age will figure in the calculation.
- The appraised value of the property—The HECM lender must have the home appraised by an FHA-approved appraiser.
- The initial interest rate on the loan—Reverse mortgages taken in the form of a lump sum usually have fixed interest rates. The other types generally have variable rates.
- The monthly advance, initial draw, and line of credit—These are factored in as applicable, depending on how payments are to be structured.
- Closing costs—Much as with any other mortgage, reverse mortgages can have a long list of closing costs, including title search, home inspection, and recording fees. A major one will be the origination fee, which goes to the lender. By law, origination fees can’t exceed $6,000.
- Mortgage insurance premiums (MIPs)—While this might also be considered a closing cost, the TALC disclosure form breaks out mortgage insurance premiums separately. FHA insurance costs 2% of the loan initially, plus another 0.5% of the outstanding loan balance every year after that.
- Monthly servicing fee—The lender or loan servicer can charge a monthly fee of up to $35.
While these factors and fees are known at the outset, how much the reverse mortgage will cost the borrower over the life of the loan can only be guessed. Therefore, the TALC disclosure computes the cost under as many as 12 different scenarios.
Those scenarios include at least three different loan terms. One assumes that the mortgage lasts for two years. The second is based on the youngest borrower’s remaining life expectancy, while the third uses 1.4 times their remaining life expectancy. Lenders also have the option of adding a scenario based on 0.5 times the borrower’s remaining life expectancy. For each of those loan terms, the disclosure form computes the cost of the loan using three different estimates of annual appreciation for the home: 0%, 4%, and 8%.
As the numbers on the TALC form will reveal, the longer the loan term, the lower the cost of the loan, because the costs are averaged out over a longer period. The appreciation estimates come into play because of the provision in HECMs that when it comes time to pay off the loan, you (or your heirs) can’t owe more than the full loan balance or 95% of the home’s appraised value, whichever is less. Thus, the less your home appreciates, the better it is for you.
When to Expect a TALC Disclosure
The law requires that the lender provide you with the TALC disclosure at least three days prior to the “consummation of a closed-end credit transaction or the first transaction under an open-end credit plan.” (A closed-end credit transaction is a loan with a fixed-rate, lump-sum distribution; an open-end one refers to all the other types.) The TALC form must also indicate that you are under no obligation to go through with the transaction.
Because some costs can differ from lender to lender, you should use TALC disclosures to comparison shop.
What Are the Types of Reverse Mortgages?
There are three basic types of reverse mortgages. Government-insured home equity conversion mortgages, or HECMs, are the most common. Some lenders offer proprietary reverse mortgages, which are not insured by the government. These may be for larger amounts than a HECM, but you need to be wary, as there are unscrupulous lenders out there. Certain states, municipalities, and nonprofit organizations offer single-purpose reverse mortgages, which, as the name suggests, are intended for a specific use, such as home repairs.
Where Can I Get a Reverse Mortgage?
Can You Get a Reverse Mortgage If Your Spouse Is Under Age 62?
As long as one member of a married couple is at least age 62, they may be able to get a reverse mortgage on their home. However, if one spouse is younger than 62, that person isn’t eligible to be a co-borrower on the loan or to continue to receive payments from it after the other spouse dies or moves out of the home.
Spouses under age 62 when the loan is initiated can be listed in the documents as an eligible non-borrowing spouse. While they won’t receive further payments from the loan after the death of the borrowing spouse, they will be allowed to remain in the home as long as they meet certain requirements. They can also be added to the loan as a co-borrower via a refinance after they reach age 62.
The Bottom Line
When you apply for a HECM, the lender must provide you with a table showing your TALC. It is an estimate of what the loan is likely to cost you based on several different scenarios, and it can be used to compare different lenders’ reverse mortgage offerings.