Understanding The TALC on a Reverse Mortgage
A reverse mortgage is an odd duck as far as loans go. While a “forward” mortgage lets homeowners build equity over time as they pay down their loan, a reverse mortgage is the opposite. It gives older homeowners regular payments to supplement their income in exchange for giving up the equity in their home.
The unfamiliarity of a reverse mortgage can make shopping for one difficult.
For a traditional “forward” mortgage, lenders give buyers two disclosure forms that are fairly straightforward: the Good Faith Estimate, and the Truth in Lending disclosure form. Both provide the projected costs of a mortgage.
For a reverse mortgage, a different type of disclosure form is provided, and it’s much more of a rough estimate than the GFE or TIL for traditional mortgages.
Called the Total Annual Loan Costs form, or TALC, this disclosure form for reverse mortgages takes into account variables that aren’t part of a traditional loan. TALC is the main disclosure that takes into account all of the projected costs of the loan.
TALC calculates costs and discloses interest rates based on at least nine separate scenarios that reflect different interest rates, loan terms and home value appreciation rates. The homeowner who is taking out the reverse mortgage decides which scenario most closely applies to them.
Comparing a few areas on the form can make it easier to shop for lenders and compare apples to apples. Here are some things to look for when shopping for a reverse mortgage:
Don’t look for APR
The interest rate on a reverse mortgage will be listed on the TALC, but don’t consider it the same as the APR, or annual percentage rate, on traditional mortgage disclosure forms.
With reverse mortgages, you usually don’t know how much money you’ll end up borrowing, so an APR calculation doesn’t work with most reverse mortgages. The TALC more accurately reflects the true of a reverse mortgage as time goes by.
And that cost can be influenced by variables such as:
- Payout distribution method.
- Timing of disbursements.
- Interest rate fluctuations.
- Home value changes in your neighborhood.
- Loan term.
Also, because monthly mortgage payments aren’t made during a reverse mortgage term, the balance grows until the loan is paid off — either when you sell the home and move, or die.
How long is the loan term?
Reverse mortgages don't have a predetermined loan term, or length. There isn’t such a thing as a 30-year reverse loan. Instead, the TALC is calculated based on conjecture using three scenarios for three different loan terms:
- Two years.
- Half of the life expectancy of the youngest borrower.
- The youngest borrower’s life expectancy.
- A term equal to 1.4 times the youngest borrower’s life expectancy.
In a sample TALC from the Consumer Financial Protection Bureau, or CFPB, the age of the youngest borrower is 75. Using life expectancy tables from the Department of Health and Human Services, the CFPB sample sets the youngest borrower’s life expectancy at 12 years. It sets the loan terms at two, six, 12 and 17 years.
How much will your home appreciate?
An assumed annual appreciation amount is also set in the TALC form. Why? Because the more your home appreciates in value, the more money you can borrow in a reverse mortgage.
The home value appreciation rates are set at zero, 4% and 8%. The 4% rate is taken from HUD’s historical housing price data and reflects the most likely appreciation rate of a borrower’s property.
If your home appreciates at a slower rate, or not at all (0%), the cost of the reverse mortgage will be lower than it would if your home appreciated at 4% or 8%. That’s because you’re able to borrow less money on a reverse mortgage when the home’s value doesn’t rise.
What are the loan costs?
The TALC must include all fees and expenses that are part of the reverse mortgage. These include origination fees, interest, mortgage insurance premiums, closing costs and service fees.
The Home Equity Conversion Mortgage, or HECM, is the most widely used type of reverse mortgage, and is a program insured by the Federal Housing Administration, or FHA. A HECM is guaranteed by the federal government, meaning the reverse mortgage payments are guaranteed to be sent to you, even if the lender goes out of business.
The HECM requires almost no out-of-pocket payments. The costs of the loan can be deducted from the loan amount.
Almost all reverse mortgages are non-recourse loans, meaning you can’t owe more than your home’s value, even if the loan balance exceeds it.
How are you withdrawing the money?
How you receive the proceeds of a reverse mortgage also affects the TALC and the cost of the loan. The money can be received in four ways:
- A lump sum when you take out the loan.
- A monthly annuity for as long as you live in the home, called a “tenure” annuity.
- A monthly annuity for a set period of time that you choose, called a “term” annuity.
- A line of credit you can use when needed, and that grows over time.
These options can be combined, such as taking out some cash at closing, getting monthly payments and having a line of credit. The CFPB sample TALC from has the borrower getting a monthly payment of $301.80, an initial draw at closing of $1,000, and a $4,000 line of credit. A reverse mortgage calculator can show you how each type of payment will affect a loan balance.
“For most borrowers the better solution is a line of credit because you only take out money when you really need it,” says Casey Fleming, a mortgage advisor in San Jose, Calif., and author of “The Loan Guide: How to Get the Best Possible Mortgage.”
You can tell the loan providers who you’re seeking reverse mortgage quotes from how you’d like to receive payments and they’ll draw up a TALC to show you the costs of different scenarios.
How much money are you getting?
The bottom line to most people in a reverse mortgage is how much money they can get out of it, says Fleming, who has been teaching reverse mortgage classes for five years.
“Most people aren’t concerned about the cost,” he says, and just want to know how much money they’ll get from a reverse mortgage.
The way to get the most money, he says, is to shop for the best interest rate with the payout scenario that works best for you. That can range from getting enough money to pay your bills each month to having a line of equity in case of emergencies.
“Most of them are just trying to stop living hand to mouth,” Fleming says of the people who take his class. They don’t have a retirement savings and need the equity in their house to pay daily living expenses.
People who have retirement income often used reverse mortgage equity lines in case they need money if the stock market drops and their retirement account falls, Fleming says.
Besides shopping for the best interest rate, look for lenders with the lowest closing costs, he recommends. While many closing costs don’t have to be paid out of pocket by the borrower, they lower how much money you can get from a reverse mortgage.
“The closing costs eat into your available equity,” Fleming says.