When shopping for a regular mortgage, the annual interest rate (APR) is a significant percentage to consider. Reverse mortgages also have a stated interest rate, but a more revealing number is the total annual loan cost (TALC). See 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 on the loan based on many different scenarios, including the duration of the loan and the value of the home.
- Generally, the longer a reverse mortgage lasts, the less it will cost the borrower on an annual basis.
Basic principles of reverse mortgage
A reverse mortgage allows homeowners to use their own funds to provide an income stream while still owning and living in their own home. They can receive the money in the form of a lump sum, monthly payments or credit line that they can raise as needed. The loan usually does not need to be repaid until the borrower dies, moves 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 are issued only by FHA approved lenders. The FHA insurance, for which the borrower pays, protects the lender in the event that he is unable to recover all his money when the reverse mortgage expires and must be repaid.
What is Total Annual Loan Coast (TALC)?
Reverse mortgages are complex and costly financial products. The law requires lenders to provide borrowers with a TALC notification form before committing to a mortgage.
The TALC disclosure attempts to quantify the cost of the loan under many different scenarios. The reverse cost of mortgages is impossible to predict with absolute certainty, because no one knows exactly how long the borrower will live or be able to stay at home.
How TALC is Calculated
Factors involved in calculating the TALC of a reverse mortgage include:
- The age of the youngest borrower—All borrowers must be at least 62 years old to qualify for a HECM, but if a married couple are of different ages — 75 and 70, say — they are the youngest spouse whose age will be calculated.
- The estimated value of the propertyThe HECM lender must have rated the home by an FHA-approved appraiser.
- The initial interest rate of 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 deposit, the initial draw and the credit limit—These are taken into account on a case-by-case basis, depending on how the payments are structured.
- Closing costsAs with any mortgage, reverse mortgages can have a long list of closing costs, including title search, home inspection, and registration fees. An important one will be the origin fee, which goes to the lender. By law, fees of origin can not exceed $ 6,000.
- Mortgage premiums (MIPs)—Although this can also be considered a closing cost, the TALC notification form analyzes the mortgage premiums separately. FHA insurance costs 2% of the loan initially, plus another 0.5% of the loan balance each year thereafter.
- Monthly service fee—The lender or the loan officer can charge a monthly fee of up to $ 35.
While these factors and commissions are known from the outset, how much the reverse mortgage will cost the borrower over the life of the loan can only be guessed at. Therefore, the TALC notification calculates the cost in up to 12 different scenarios.
These scenarios include at least three different loan terms. One assumes that the mortgage lasts two years. The second is based on the remaining life expectancy of the youngest borrower, while the third uses 1.4 times his remaining life expectancy. Lenders can also add a scenario based on 0.5 times the borrower’s remaining life expectancy. For each of these loan terms, the notification form calculates the cost of the loan using three different annual home appraisal estimates: 0%, 4% and 8%.
As the numbers on the TALC form will reveal, the longer the term of the loan, the lower the cost of the loan, because the cost is calculated on average over a longer period. The revaluation estimates come into play because of the HECM provision that when it comes time to repay the loan, you (or your heirs) can not owe more than the full balance of the loan or 95% of the appraised value of the home, whatever of the two is less. So the less you value your home, the better it is for you.
When to Expect a TALC Revelation
The law requires the lender to provide you with the TALC notification at least three days before the “completion of a closed-ended credit transaction or the first transaction under an open-ended credit plan”. (A closed-ended credit transaction is a fixed-rate, one-time loan; an open fee applies to all other types.) The TALC form should also indicate that you have no obligation to submit the transaction.
Because some costs may vary from lender to lender, you should use TALC notifications at the comparison store.
What Are The Types Of Reverse Mortgages?
There are three basic types of mortgages. Mortgage-backed mortgages that are state-insured or HECMs are the most common. Some lenders offer privately owned reverse mortgages, which are not secured by the government. These may be for larger amounts than a HECM, but you need to be careful as there are unscrupulous lenders out there. Some states, municipalities, and nonprofits offer one-purpose reverse mortgages, which, as the name implies, are intended 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?
If a 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 the age of 62, that person is not entitled to be a co-borrower on the loan or to continue to receive payments on it after the other spouse dies or leaves home.
Spouses under the age of 62 at the time of the loan can be listed in the documents as eligible non-borrowing spouses. Although they will not receive further payments from the loan after the death of the borrowing spouse, they will be allowed to stay at home as long as they meet certain conditions. They can also be added to the loan as co-borrowers through refinancing after reaching the age of 62.
The bottom line
When applying for an HECM, the lender must provide you with a table showing your TALC. It is an estimate of the cost that a loan is likely to cost you based on many different scenarios and can be used to compare the reverse mortgage offers of different lenders.