When shopping for a regular mortgage, the annual percentage rate (APR) is an important number to consider. Reverse mortgages also have a stated interest rate, but a more telling figure is the Total Annual Loan Cost (TALC). Here’s how TALC is calculated and what you can learn from it.
Key points to remember
- Lenders must provide applicants for federally insured reverse mortgages with a table of the total annual loan cost (TALC).
- The TALC is an estimate of the interest rate they would pay for the loan based on several different scenarios, including the term of the loan and the appreciation of the home.
- 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 the equity in their home to generate a stream of income while owning and living in their home. They can receive the money in the form of a lump sum, monthly installments, or a line of credit that they can draw on as needed. The loan generally does not have to be repaid 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. FHA insurance, which the borrower pays for, protects the lender in the event that they are unable to recover all of their money when the reverse mortgage ends and needs to be repaid.
What is the Total Annual Loan Score (TALC)?
Reverse mortgages are complicated and expensive financial products. The law requires lenders to 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 stay in the home.
How TALC is calculated
Factors that go into calculating the TALC of a reverse mortgage include:
- The age of the youngest borrower-All borrowers must be at least 62 years old to be eligible for a HECM, but if a married couple are of different ages – 75 and 70, for example – the younger spouse’s age will figure into the calculation.
- The appraised value of the property—The HECM lender must have the home appraised by an FHA-certified appraiser.
- The initial interest rate of the loan—Reverse mortgages taken out as a lump sum usually have fixed interest rates. The other types usually have variable rates.
- The monthly advance, the initial withdrawal and the line of credit—These are considered on a case-by-case basis, depending on how payments are to be structured.
- Closing costs—As with any other mortgage, reverse mortgages can have a long list of closing costs, including title search, home inspection and registration fees. One of the main ones will be the origination fees, which go to the lender. By law, assembly fees cannot exceed $6,000.
- Mortgage loan insurance premiums (MIP)—While this could also be considered a closing cost, the TALC disclosure form breaks down mortgage insurance premiums separately. FHA insurance initially costs 2% of the loan, plus an additional 0.5% of the outstanding loan balance each year thereafter.
- Monthly service charge—The lender or loan officer may charge a monthly fee of up to $35.
While these factors and fees are known upfront, how much the reverse mortgage will cost the borrower over the term of the loan is anyone’s guess. Therefore, the TALC disclosure calculates the cost under no less than 12 different scenarios.
These scenarios include at least three different loan terms. The mortgage is assumed to last 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 these loan terms, the disclosure form calculates the cost of the loan using three different estimates of the annual home appreciation: 0%, 4%, and 8%.
As the numbers on the TALC form reveal, the longer the term of the loan, the lower the cost of the loan, as the costs are averaged over a longer period. Appreciation appraisals come into play because of the HECM provision that when repaying the loan, you (or your heirs) cannot owe more than the full loan balance or 95% of the appraised value of the loan. home, whichever is less. So, the less your house appreciates, the better it is for you.
When to expect a TALC disclosure
The law requires the lender to 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 credit transaction is a loan with a lump sum distribution at a fixed rate; an open transaction refers to all other types.) The TALC form should also indicate that you are not obligated to go through the transaction.
Since some costs may differ from lender to lender, you should use TALC information to make comparisons.
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 exclusive reverse mortgages, which are not government insured. These can be for larger amounts than a HECM, but you should beware as there are unscrupulous lenders out there. Some states, municipalities, and nonprofits offer one-time reverse mortgages, which, as the name suggests, are for a specific purpose, such as home repairs.
Where can I get a reverse mortgage?
Can you get a reverse mortgage if your spouse is under 62?
As long as one member of a married couple is at least 62 years old, they may be able to get a reverse mortgage on their home. However, if one spouse is under age 62, that person is not eligible to be a co-borrower on the loan or to continue to receive payments after the death or departure of the other spouse.
Spouses under the age of 62 at the time of loan initiation may be listed in the documents as an eligible non-borrowing spouse. Although they will no longer receive payments on the loan after the death of the borrowing spouse, they will be allowed to stay in the home as long as they meet certain requirements. They can also be added to the loan as a co-borrower through a refinance after reaching age 62.
When you apply for a HECM, the lender must provide you with a table showing your TALC. This is an estimate of what the loan is likely to cost you under several different scenarios, and it can be used to compare reverse mortgage offers from different lenders.