There are costs associated with loans, and reverse mortgages are no different. In a conventional mortgage, knowing the loan’s annual percentage rate can help a borrower understand what they will pay in interest over the life of the loan. Because a reverse mortgage does not have a specified term, a more useful tool for understanding what the loan will cost is the total annual loan cost (TALC).
Here’s an explanation of TALC, the factors that determine it, and how it can influence your decision about whether a reverse mortgage is right for you.
What is a total annual loan cost (TALC) disclosure?
A TALC is a disclosure that illustrates projected total costs over the life of a reverse mortgage as an annual rate. The TALC is only an estimate since it is not possible to pinpoint how long a borrower will stay in the home or how long they will live. However, a TALC disclosure demonstrates that the reverse mortgage borrower costs less the longer they have the loan since all charges are spread out over time.
The TALC is a statement required by the Housing and Urban Development (HUD) for all home equity conversion mortgages (HECM). Lenders are required to provide a TALC to any borrower entering a reverse mortgage. Typically, the lender provides the TALC disclosure before closing so that the borrower can review how the cost of the reverse mortgage varies over time and with house price appreciation prior to making a decision. The TALC is also a useful tool when comparing lenders to find the best loan option for you. There are various deadlines that lenders are required to meet in providing a TALC. It is in the borrower’s best interest, however, to ask for the TALC early in the process, so that they can use it to assess lender options.
All TALC statements must state that the borrower is not obligated to continue the transaction.
Reading the TALC
The TALC statement includes specific information about the loan and a chart detailing what the total loan cost will be if the borrower stays in the loan for different periods. On the chart, these periods are called “disclosure periods” because these are the loan terms the lender is required to disclose to the borrower in the TALC.
While the TALC is based on estimates, lenders use the following information to calculate total loan cost scenarios. These factors are listed on the TALC statement along with the specific information about the borrower and the loan.
- Age of the Youngest Borrower
- Appraised Property Value
- Interest Rate
- How the Borrower Will Receive Loan Proceeds.
- Closing Costs
- Mortgage Insurance Premiums (MIP)
- Servicing Fee.
Because the outcome of a reverse mortgage is tied to unpredictable factors, lenders are required to show three different loan term scenarios in the TALC.
- First Loan Term Option. The mortgage lasts for two years.
- Second Loan Term Option. This calculation is based on the youngest borrower’s remaining life expectancy.
- Third Loan Term Option. The calculation is based on 1.4 times the youngest borrower’s life expectancy.
For each term option, the lender calculates the total cost as if the home appreciates at 0%, 4%, and 8%. This will give a total of nine possible outcomes that allow the borrower to understand their risk and likely loan outcomes. Not all scenarios are necessarily listed on the TALC.
Property value appreciation, changes in the interest rate, and the borrower’s personal financial situation will not affect the loan terms and are not considered in the TALC.
What is the significance of a TALC for the borrower?
The significance of a TALC is to assist borrowers in understanding the projected costs of a reverse mortgage over a period of time. In general, the longer a reverse mortgage lasts, the less it will cost the borrower annually. The TALC demonstrates that if the borrower only plans to stay in a home for a few years, a reverse mortgage is probably not a good choice.
