When you apply for a reverse mortgage, among all the pages of disclosures that you come across, you will find a disclosure called the TALC or Total Annual Loan Costs. Well, what is this form and why is it important?
Simply put, the TALC (Total Annual Loan Costs) combines all of a reverse mortgage's costs into a single annual average rate. TALC disclosures can be useful when comparing one type of reverse mortgage to another. But they also show that the true, total cost of an individual reverse mortgage loan can vary significantly and can end up being much more — or less — expensive than you might imagine.
One of the main takeaways from the TALC is that reverse mortgages are best suited for those who wish to remain in their home for a longer period of time. When viewing the TALC, you will find that the TALC rate is always higher in the short-term. The reason short-term TALC rates are very high is because the initial costs are usually a very large portion of the total amount that you owe in the early years of the loan. As time passes, your initial costs become a smaller amount of the total debt and therefore the TALC rates decline. See the image below.
Example 1: TALC Rates over Time:
TALC Table
There are two reasons why TALC rates go down over time. The first, as mentioned above, as the upfront loan costs get spread out over time, they become a smaller part of the total amount owed. Second, as the loan balance rises over time, the likelihood increases that it will catch up to, and then be limited by the homes value. Don't forget that reverse mortgages are non-recourse loans, which means you can never owe more than the value of your home. If a rising loan balance surpasses the home value, the borrower will never owe more than that value.
But, that's not all there is to the TALC. Why is it that a loan with the exact same rates and fees can have a different TALC rate? To answer this question, we must first acknowledge that there are different payment plans available under reverse mortgages (lump sum, tenure, term, line of credit, or a combination). Now, remember that the TALC is calculated using your initial closing costs as a portion of your total loan balance. In the next example below, you will see how different draw options at closing impact the TALC rate.
Example 2: TALC Rates Under Different Plans:
TALC Table
Now the important question. Why should I care? It is important to understand all the costs involved in a HECM reverse mortgage. Additionally, a reverse mortgage may not be the right financial solution for all borrowers. If you plan on moving out of your home in the short term, perhaps a HECM may not be the best solution due to the high cost of the short-term.
Perhaps the most interesting part of the TALC is the fact that there are three non-cost items that affect the TALC that the lender has zero control over.
