What is a Total Annual Loan Cost (TALC)?
The TALC is a reverse mortgage disclosure that not only satisfies federal Truth in Lending Act (TILA) requirements, but it also tells a powerful reverse mortgage story. It demonstrates that the longer the borrower lives in the home, the lower the annual cost of a reverse mortgage because the upfront costs are spread out over more years.
Most loans disclose an Annual Percentage Rate (APR). However, that’s not possible with a HECM because it has no reasonable, or predictable, ending date (term). Instead, it has a due date of the youngest borrower’s 150th birthday, and we know that’s no basis for calculating an APR.
Why is the TALC expressed as a table?
With a reverse mortgage, we don’t know 1) the loan term or 2) the home appreciation rate over time. Therefore, a table is required to show multiple combinations of each.
When you view the TALC, you will generally see combinations of four loan terms and three appreciation rates. This gives the borrower an idea of the short- and long-term costs of the product.
- TERM: The TALC will generally show the following four time periods: 2 years, half life expectancy, life expectancy, and 1.4 times life expectancy
- APPRECIATION: The TALC will show three home appreciation rates: 0%, 4%, 8%.
Note that home appreciation is important because non-recourse loans with little or no home appreciation could have a portion of the loan balance forgiven (if the loan balance exceeds the home’s value). This would reduce the total cost to the consumer.
Why is 93% of home value listed in every TALC disclosure?
When calculating a TALC, we need to know what the homeowner would hypothetically net in a sale. The Truth in Lending Act requires that IF the amount required to be repaid is limited to the net proceeds of a sale, then we must consider the costs of that sale. This portion of the disclosure became federal law as per 12 CFR Appendix K to Part 1026.
How do we calculate the percentages shown on the TALC?
The calculation is somewhat complex. But if you are into that sort of thing, the computations related to this disclosure are found here. In layman’s terms, the TALC considers ALL the costs of the mortgage, including closing costs, out-of-pocket costs, mortgage insurance, interest, and more before expressing those costs as an annual rate.
How do we explain the TALC to a client?
Sometimes, using extremes to explain the TALC is the most effective approach. For example, let’s assume the client obtains a reverse mortgage and sells the home the next week. That would be an extremely expensive transaction with a very high TALC rate because the costs don’t justify the short-term benefit. This phenomenon is not unique to reverse mortgages. Even traditional loans with upfront costs can be expensive if used for short-term financing.
By contrast, if the client lives in the home for another 40 years or more, the upfront costs are insignificant considering the long-term benefit, and the TALC rate could be lower than the loan note rate.
For more information on reverse mortgage guidelines, please consider purchasing the books Understanding Reverse, and Navigating Reverse, and subscribe to this blog.
Dan Hultquist