APR Annual Percentage Rate
APR Annual Percentage Rate: The APR is one of the most misunderstood calculations for mortgage lending and consumer loans. It is the total cost of the loan, including finance charges.
The annual percentage rate is a term that is used in the Truth-in-Lending Act to represent the percentage relationship of the total finance charge to the amount of the loan on an annual basis. –Mortgage Banking Terms
Truth-in-Lending Fair Credit Act
Truth-in-Lending Act/Disclosure: This disclosure is required by Federal Law. It is part of the Consumer Credit Protection Act that requires lenders to fully disclose credit terms and conditions, the annual percentage rate, and other charges, “in writing.” It is intended to assure borrowers are given information they can understand with respect to the cost of credit. With this form you can also compare what lenders are charging and if there are substantial differences; change your lender.
The Truth-in-Lending sometimes referred to as the TIL; is one of three disclosures you must receive within three (3) days of making a loan application.
APR – How it works
The APR is NOT your rate of interest. Your rate of interest is still the 3.90% and your payment is based on that rate only.
To break this down a little further; on a mortgage loan it is the base rate of the loan plus any upfront finance charges which are added into the loan.
Example:
$450,000 original mortgage amount for 30 yrs +
3,000 any upfront finance charges/closing cost (those paid by the applicant)
3.900 the interest rate you have been quoted and locked into
3.995% = APR
Example 2:
$450,000 loan amount for 30 yrs +
10,000 upfront finance charges/closing cost (those paid by applicant) rate is
3.900% the interest rate you have been quoted and/or locked into
4.860% = APR
This gives the total finance charge for 30 years.
The more closing cost the applicant pays out of pocket; the higher the APR will be as that is part of the finance charges that is being paid for this loan. Your interest for the loan stays the same at 3.90% and your mortgage payment is based solely on that.
Principal and Interest Payment
The base principal and interest payment would be: $2,122.51 for 30 years on the above mortgage amount of $450,000 @ 3.900%.
$200,000 mortgage @3.900% for 30 yrs = $943.34
This payment will not change unless your interest rate is not locked when you receive the Good Faith Estimate and TIL (Truth-in-Lending) disclosure.
Good Faith Estimate
What is the difference in the TIL and GFE
The TIL (Truth-in-Lending) disclosure gives you the total charges of the loan; while the Good Faith Estimate (GFE) disclosure breaks down the closing cost which you are being charged for the loan. The GFE estimate gives the following breakdown:
- Origination fee
- Interest Rate *either floating or locked
- Discount points * if you choose a lower interest rate than quoted
- Broker fee – added in the origination fee; if applicable
- Credit report fee
- Processing fee
- Underwriting fee
- Title fees **Attorney
- Title Insurance
- Transfer Tax (State and Local)
- Initial Escrow Charges ** taxes and insurance deposits; if applicable/usually 2 months
- Daily interest from the day you close until the 1stof the following month
- Homeowner’s insurance
The Truth-in-Lending disclosure gives the base amount of the mortgage loan $450,000 + total finance charges for the life of the loan + the closing cost and/or points paid at closing and = the total amount financed. It indicates the base interest rate + finance charges = APR.