Truth in Lending - Explaination
The Lender will be providing you with a "Truth in Lending" form at a later date. This form will explain how your finance changes are calculated. Below is a reference for the most commonly asked questions pertaining to the "Truth in Lending" statement.
ANNUAL PERCENTAGE RATE
The cost of your credit at a yearly rate.
The dollar amount the credit will cost you.
The amount of credit provided to you or on your behalf.
Total of Payments
The amount you will have paid after you have made all payments as scheduled.
Q. What is a Truth-in-Lending Disclosure and why do I receive it?
A. The Disclosure is designed to give you information about the costs of your loan so that you may compare these costs with those of the other loan programs or lenders.
Q. What is the ANNUAL PERCENTAGE RATE? (Box "A" Above)
A. The Annual Percentage Rate (A.P.R.) is the cost of your credit expressed as an annual rate. Because you may be paying loan discount "points" and other "pre-paid" finance charges at closing, the A.P.R. disclosure is often higher than the interest rate on your loan. This A.P.R. can be compared to the A.P.R. on other loan programs to give you a consistent means of comparing rates and programs.
Q. Why is the ANNUAL PERCENTAGE RATE different from the interest rate for which I applied?
A. The A.P.R. is computed from the Amount Financed and is based on what your proposed payments will be on the actual loan amount credited to you at settlement. In a $50,000 loan with $2,000 Prepaid Finance Charges, a 30 year term and a fixed interest rate at 12%, the payments would be $514.31 (principal and interest). Since the A.P.R. is based on the Amount Financed ($48,000), while the payment is based on the actual loan amount given ($50,000), the A.P.R. (12.553%) is higher than the interest rate.
Q. What is the FINANCE CHARGE? (Box "B" Above)
A. The Finance Charge is the cost of credit expressed in dollars. It is the total amount of interest calculated at the interest rate over the life of the loan,plus Prepaid Finance Charges and the total amount of any required mortgage insurance charged over the life of the loan.
Q. What is the AMOUNT FINANCED? (Box "C" Above)
A. The Amount Financed is the loan amount applied for, minus the Prepaid Finance Charges. Prepaid Finance Charges include items paid at or before settlement, such as loan origination, commitment or discount fees ("points"), adjusted interest, and initial mortgage insurance premium. The Amount Financed is lower than the amount you applied for because it represents a NET figure. If you applied for $50,00 and the Prepaid Finance Charges total $2,000, the Amount Financed would be $48,000.
Q. Does this mean I will get a smaller loan than I applied for?
A. No. if you loan is approved in the amount requested, you will receive credit toward your home purchase or refinance for the full amount for which you applied. In the example above, you would therefore receive a $50,000, not a $48,000 loan.
Q. What is the TOTAL OF PAYMENTS? (Box "D" Above)
A. This figure represents the total amount you will have paid if you make the minimum required payments for the entire term of the loan. This includes principal, interest and mortgage insurance premiums, but does not include payments for real-estate taxes or property insurance premiums. This figure is estimated on the Disclosure Statement and is estimated in any adjustable rate transaction.
Q. My Disclosure says that if I pay the loan off early, I will not be entitled to a refund of part of the finance charge. What does this mean?
A. This means that you will be charged interest for the period of time which you used the money loaned to you. Your prepaid finance charges are generally NOT refundable, nor is any interest which has already been paid. If you pay the loan off early, you should not have to pay the full amount of the "finance charges" shown on the disclosure..
Q. What is the Filing Fee?
A. The Filing Fee is an estimate of the cost of recording the legal documents (mortgage, deed of trust, deed, etc.) connected with your transaction. The fee will be charged at settlement; please do not send it now.
The Truth About Rates and APR
Here is a definition of APR (Annual Percentage Rate) we pulled for another mortgage Web site:
The first sentence is true.
The second sentence could not be further from the truth.
The Real Truth About APR
Truth # 1 - Annual Percentage Rate disclosure requirements were established by a rule known as REG Z. All lenders are required to comply with REG Z by disclosing the APR on a form known as "The Truth In Lending Disclosure"
Truth # 2 - Reg Z allows each lender to comply with REG Z in their own way as long as they have a written legal opinion stating they are in compliance. Therefore, virtually all lenders have their own way of calculating their "Truth In Lending Disclosure."
Truth # 3 - Since all lenders do not apply the same rules in calculating the Annual Percentage Rate, it absolutely, positively does not provide consumers with a good basis for comparing loan costs.
Using the APR to comparison shop is absolutely worthless. Can we be any more clear?
How To Really Shop For A Home Loan - Five Steps to Peace of Mind
Step # 1 - Determine what type of loan you need and/or want. With today's rates, usually the choice is easy - a 30 or 15 year fixed rate loan.
Step # 2 - Shop at least three lenders. Even with a referral you need to get a written estimate so you can compare quotes. This is the only guaranteed way to get a good rate at a fair price.
Step # 3 - Request a written quote from each lender that discloses every fee, point, charge, cost and credit associated with your transaction, based on an interest rate guarantee of 30 days (a 30 day lock).
Step # 4 - Follow the rule of SAME. Make certain each lender quotes the SAME LOAN TYPE, for the SAME TERM, for the SAME RATE, for the SAME LOCK PERIOD on the SAME DAY. Anything less and you are not comparing apples to apples.
Step # 5 - Do the math. Sit down with each quote; eliminate the costs of interim (or per diem) interest, property taxes, homeowners insurance and mortgage insurance. Leave everything else in. The lender with the lowest cost after these adjustments is the least expensive. If the differences are too close to care about, then stick with the referred lender. If the differences are significant to you, then give the referred lender a last chance to earn your business. If a non-referred lender is the winner, then ask them for references.