Reverse Mortgage Basics
Total Cost Disclosures
The true, total cost of a reverse mortgage depends on factors other than its various costs. Knowing the specific costs that will be charged on a reverse mortgage, therefore, is only the first step in understanding its total cost. You also need to understand how that cost will vary based on the other factors that affect it.
- The TALC (Total Annual Loan Cost) of a reverse mortgage depends upon:
- how long you live in your home; and
- what happens to its value during that time.
In general, the TALC rate is greatest when the loan is repaid within a few years after closing when the upfront costs are still a large part of the total amount owed. On the other hand, TALC rates are lowest when you live longer than others your age, or when your home’s value grows little, or declines.
TALC Shortcomings
When they went into effect in the mid-1990s, TALC disclosures were an important step in alerting consumers to the real costs of reverse mortgages. But since then, a number of problems with these disclosures have become clear.
The vast majority of reverse mortgage borrowers select a creditline. The true cost of these creditlines depends to a large degree on the size and timing of the cash advances requested by the borrower during the life of the loan. But TALC regulations require lenders to assume that all borrowers will request one-half of their creditline at closing, and none thereafter. This simplifies the calculation and provides a way to compare different creditlines.
But it does not reveal how different the true cost of these loans can be based on a borrower’s pattern of creditline advances. And it does not reflect the value of a growing versus a non-growing creditline.
TALC regulations also require lenders to assume that the initial interest rate charged on a reverse mortgage will never change. This assumption simplifies the calculation and provides a single standard of comparison.
But after the past few years of low interest rates, future rates may be less likely to remain low. So this assumption may result in an underestimate of the true cost of current reverse mortgages.
- TALC disclosures also do not address two key considerations for reverse mortgage borrowers:
- the total amount of cash you get from the loan; and
- the amount of equity you or your heirs get to keep at the end of the loan.
