One of the disclosures that borrowers receive that often causes confusion is the Regulation Z – Truth-in-Lending statement (TIL). The primary area is the statement regarding the Annual Percentage Rate (APR). The APR will usually be higher than the interest rate that the borrower is getting on the mortgage rate. This often causes the borrower to be confused or at worst, think that he is being cheated by the lender in some way.
The easiest way to explain APR is to realize that a lender charges certain fees at the time of the closing that paid either to a lender or is required to be paid to a third party as part of the mortgage transaction. When the APR is figured, these fees are subtracted from the requested loan amount and this shows as the “Amount Financed” on the TIL. Here is a scenario as a simple example.
- Loan Amount $100,000.00
- Fixed Interest Rate 4%
- 30 year term (360 payments)
- Fees paid to the lenders or other 3rd party – $1000.00
- Monthly P&I Payment for the mortgage as requested $477.42
Using these figures, the amount financed is $99,000.00. But the payment remains at the $477.42 amount. So then, the lender will figure what interest rate at $99,000.00 would give a payment in the amount of $477.42. When this is done, the interest rate that would give those figures is 4.0835%. So even though the actual note rate is 4%, the APR on the loan is the higher figure of 4.0835%.
Factors that can affect the APR addition to the fees that are paid to the lender or to third parties are the type of loan (Fixed vs. Adjustable); the term (30 vs 15 year etc.); or whether the mortgage has mortgage insurance on the transaction.
APR is often a cause of confusion for borrowers. However, once the basic math is explained, then it becomes clear what is happening on the TIL disclosure. For a more detailed and complete explanation of APR, contact your Googain Loan Officer for more information.