Understanding Reverse Mortgage Disclosures
Even if you have been through the process of obtaining conventional mortgages and home equity loans in the past, you may find the concept of a reverse mortgage a little unfamiliar at first. Fortunately though, there are required disclosures which help lay out the most important information.
The Truth in Lending Act (TILA) mandates that certain disclosures be made before a loan is originated, and this includes specific disclosures for reverse mortgages. What follows will help you review and interpret this information.
Reverse Mortgage Disclosure Form
A centerpiece of TILA is that lenders must give borrowers a form summarizing key terms and costs of the loan. The intention is that these forms be clear, complete, and somewhat uniform from one lender to the next. That uniformity should make it easier to compare lenders.
Reverse mortgage disclosures are required to be made at least three days before a loan transaction takes place, and you are not obligated to follow through with the loan just because you have signed off on receiving the disclosure.
Reverse Mortgage Disclosure Content
Some of the key content you should find on a reverse mortgage disclosure form includes:
- Identity of the lender
- Amount borrowed
- Total finance charges
- Annual Percentage Interest Rate (APR)
- Repayment terms
- Penalties for late payment or prepayment
In addition, reverse mortgages require the disclosure of Total Annual Loan Costs (TALC). Unlike with a conventional mortgage, the length of a reverse mortgage is generally not known in advance. They are designed to be repaid when the home owner dies, moves, or sells the home. In addition, while some reverse mortgages provide a lump sum at initiation, others provide a monthly payment to the home owner, so even the amount of principal cannot be known in advance in such cases. As will be explained below, this uncertainty makes a projection of TALC a key factor in a reverse mortgage.
What it All Means
Your lender should provide you with a good-faith projection of TALC under a variety of scenarios--specifically, over a period of years assuming everything from a short to a long duration of the loan. TALC calculations include both annual percentage rates and any loan fees. Since those fees are typically one-time charges, this makes the loan more expensive as a percentage of principal in the early years, especially if payments to the borrower are coming in monthly increments. That percentage cost should decline considerably as time goes on.
The concept of TALC has important implications. It means that you should favor a lump sum approach if you are assuming a loan duration of only a few years, while a monthly payout method will be less expensive over longer time periods. Also, when comparing lenders, make sure the loans are of the same amount and payout schedule. Take your best guess at the key variables such as duration and payment method, because this will help put TALC figures on an even footing so you can accurately evaluate cost.
Sources:
Reverse.org
