The true, total cost of a reverse mortgage depends on factors in addition to its various itemized costs. Knowing the specific costs that will be charged on a reverse mortgage 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.
The Total Annual Loan Cost (TALC) of a reverse mortgage also depends upon
• how long you live in your home; and
• what happens to its value during that time.
In general, the TALC rate is highest 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 other people your age, or when your home's value grows little or declines.
When they went into effect in the mid-1990s, TALC disclosures were an important step in showing the real costs of reverse mortgages. But since then, a number of problems with these disclosures have arisen.
Most reverse mortgage borrowers choose a credit line. The true cost of these credit lines depends to a large degree on the size and timing of the cash advances requested by the borrower.
But TALC calculations assume that all borrowers will request one-half of their credit line at closing, and none later. This simplifies the math and provides a way to compare different credit lines. But it doesn't show how different the true cost of these loans can be based on a borrower's pattern of credit line advances. And it doesn't show 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 also simplifies the math, and provides a single standard of comparison. But if you get a reverse mortgage when interest rates are historically low, they are not likely to stay low for as long as your loan lasts. They probably will go up. So the TALC report you get may underestimate of the true cost of your reverse mortgage.
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.
AARP's Model Specifications
In 2000, under a grant from the U. S. Department of Housing and Urban Development, the AARP Foundation's Reverse Mortgage Project asked reverse mortgage counselors and lenders to work with the project to create a more complete and customized way to measure costs and benefits.
The result was a set of model specifications for analyzing and comparing reverse mortgages. The specifications are based on a simple way of looking at these loans.
All reverse mortgages turn your home equity into three things:
• loan advances paid to you;
• loan costs paid to the lender and others; and
• leftover equity, if any, paid to you or your heirs at the end of the loan.
Because reverse mortgages turn home equity into only these three things, you can analyze any reverse mortgage by asking three simple questions:
• How much would I get?
• How much would I pay?
• How much would be left at the end of the loan?