Comparing reverse mortgages: understanding the TALC disclosure

Talking the TALC: reverse mortgage disclosure

The reverse mortgage is a refinance, but it's not what you're used to. Reverse mortgage lenders are required by law to furnish in writing an estimate of the total cost of a reverse mortgage. This is called the Total Annual Loan Cost, or TALC, and it's mandatory because without it you'd have a very hard time evaluating competing refinance mortgage offers.

TALC rate not the same as APR

Lenders have to use the term "total annual loan cost rate" and make it very clear that this is NOT the loan's APR. TALC more accurately describes the true cost of a reverse mortgage over the life of the loan. With traditional (no negative amortization) forward mortgages, you know in advance how much you will be borrowing.

But with a reverse mortgage, you don't know your final mortgage balance at first. It depends on how you choose to take your proceeds (a lump sum, a line of credit, regular monthly payments or a combination), what interest rates do (most reverse mortgages come with variable rates) and how long you keep the loan. Your balance grows until your loan is repaid because you aren't required to make monthly payments.

The cost of a reverse mortgage is shown as a percentage of the amount borrowed and is called the TALC rate. It's generally higher than the APR for the same loan.

TALC Refinance Disclosure Includes at Least Three Scenarios

TALC rates depend on several variables, so they must be calculated based on three scenarios: 2 year loan term, the youngest borrower's life expectancy, and 1.4 times the youngest borrower's life expectancy. The tables can be found in this government publication, an appendix to Regulation Z.

Because you can't be required to repay more than your home's value, property appreciation rates come into play. TALC rates must be disclosed assuming three annual property appreciation rates: zero, 4 and 8 percent. The 4-percent rate is taken directly from HUD's historical housing appreciation data and should be considered the most likely outcome. The zero-percent and 8-percent figures are added to illustrate the way different property appreciation rates affect the ultimate cost of the loan. Look at this sample TALC from HUD: it shows how a lower property appreciation rate means lower potential costs to you.

The three scenarios also demonstrate the way costs change as your loan term lengthens. The upfront mortgage insurance is based on the potential claim amount (your home's value), not the (unknown) loan amount. Closing costs like origination fees are also paid in advance. So if you only use your reverse mortgage for a couple of years, the costs could be very high.

For example, if you expend $10,000 up front with the expectation of collecting $1,000 a month until you die, but then health problems force you to move after only two years (so you only get $24,000), your fees nearly equal half of your loan proceeds, and you have to pay interest on $34,000 ($24,000 collected plus $10,000 in fees).

On the other hand, if you were able to take $1,000 a month over a 20-year period, you would collect $240,000. Your fees would be a smaller part of your proceeds. Your mortgage balance would be the $240,000 plus interest and fees of $10,000. And if your property were only worth $200,000 at the time your mortgage came due, you'd come out way ahead because you could never be forced to pay more than the $200,000. You can see that the total cost of borrowing depends substantially on factors neither you nor your lender can control.

TALC costs and other mortgage refinancing disclosures

The TALC must include all costs and charges that you pay, including lender fees, reverse mortgage interest and mortgage insurance. Reverse mortgages involve very few out-of-pocket charges, but all costs, whether paid upfront or not, must be reflected in the TALC scenarios. If your loan contains a provision for sharing property appreciation with your lender, that must be included. Finally, your costs can be reduced by limitations on your liability like the no-recourse feature that makes it impossible for you to be forced to repay more than the property value.

Finally, lenders must advise you of the following in writing:

  • You are not obligated to complete the reverse mortgage transaction because you have received TALC disclosures or have applied for a reverse mortgage.
  • List and explain the loan terms and charges, and the factors that go into the calculations: 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 you at least three business days before closing escrow and funding the loan.

How to shop for a reverse mortgage

Get TALCs from several refinance lenders that offer reverse mortgages. Look at FHA Home Equity Conversion Mortgages (HECMs) and proprietary or jumbo reverse mortgages. Determine which TALC scenario most accurately reflects your situation (your expected loan term and how you plan to take the loan proceeds), and choose the alternative with the lowest TALC. In addition, research other financing options (like home equity loans or cash-out refinancing) that may accomplish the same goal but cost less.