By: John Krajsa
AFC Reverse Mortgage
Last week in “Cost of a Reverse Mortgage – Part II” we attempted to demonstrate how dollar cost, standing alone, can be misleading in evaluating the cost of a loan, since a loan is really a rental transaction. You don’t buy money; you pay a fee to use it for a period of time and then return it, and the appropriate measure of the cost of a rental transaction is the periodic charge, which in a loan is the annual rate.
The Federal government in the Truth in Lending Act, passed in 1968, originally provided us with the Annual Percentage Rate (APR), and more recently has provided us with the Total Annual Loan Cost rate disclosure (TALC) for reverse mortgages. These Federal cost estimates, found in Section 226 of Regulation Z promulgated by the Federal Reserve, estimate the true cost of a loan with cost expressed as an annual rate. Unlike the APR, the TALC disclosure for reverse mortgages always includes all costs (closing costs, FHA insurance premiums, monthly service fees and, of course, interest). Also, unlike the APR disclosure which only estimates the cost of a loan at one point in time, TALC rate disclosures estimate the total annual cost of a reverse mortgage at various points in time.
Consumer advocates have praised the TALC as “. . . more complete than the Annual Percentage Rate (APR) disclosure required for other loans.” TALC disclosures generally estimate the total annual cost of a reverse mortgage to be higher in the early years and lower as time goes on, and to be lowest when the loan is used for its intended purpose, as a long-term solution. We’ll talk more about TALC rates next week.
AFC Reverse Mortgage Blog 