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Thursday, May 26, 2016

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APR Information

Federal law requires lenders to provide APR information to applicants in a document known as the "Truth-in-Lending Disclosure Statement." The following are some of the most frequently asked questions about the "Truth-in-Lending Statement" and their answers. For more information regarding this mortgage topic or others you may contact us.

Q. What is a Truth-in-Lending Disclosure statement and why do I receive it?
A. The disclosure statement provides information Federal law requires us to give applicants. The purpose of the statement is to give applicants information about their loan and help them determine the true cost of credit.

A.The Annual Percentage Rate or A.P.R. is the cost of credit expressed in terms of an annual rate, and it takes into effect the interest rate paid over the life of the loan, required private mortgage insurance (PMI) paid during the term of the loan, and the amount of prepaid finance charges paid at or before loan closing. The A.P.R. is often higher than the interest rate because of prepaid finance charges and PMI.

A. The amount financed is the principal loan amount minus prepaid finance charges. A prepaid finance charge is a "finance charge" paid by the borrower separately in cash or by check before or at closing of a loan transaction, or withheld from the loan proceeds. A "finance charge" is any charge or fee payable by the borrower that is imposed by the lender as a condition of the loan (unless excluded by regulation). Prepaid finance charges may include items such as loan origination fee, discount points, prepaid interest, and the initial PMI.

Q. Does this mean an applicant will get a lower mortgage than they applied for?
A. No. If the loan is approved for the amount they applied for that's how much will be credited towards their home purchase or refinance at settlement.

Q. Why is the ANNUAL PERCENTAGE RATE different from the rate the applicant applied for? Why is the AMOUNT FINANCED different?
A. The AMOUNT FINANCED is different because it represents a net figure. If someone applied for a mortgage of $100,000 and their prepaid finance charges total $3,000, the amount financed would be shown as $97,000, or $100,000 minus $3,000.

The A.P.R. is computed from this lower figure. Based on what your proposed payments would be for a $100,000 loan with an interest rate of 9.5% the payments would be $840.85 (principal and interest) on a loan with a thirty year term. Since the A.P.R. is based on the net amount financed ($97,000), rather than the actual mortgage amount, the A.P.R. is higher than the interest rate. It would be 9.855%. If the applicants loan were approved he would still receive a $100,000 loan for thirty years with monthly payments of $840.85 at 9.5% note rate.

Q. What is the FINANCE CHARGE?
A. The finance charge is the cost of credit expressed as a dollar amount. It includes any charge (including interest) paid by the borrower as a condition of the loan (unless excluded by regulation).

A. This figure represents what the applicant will have paid, including principal, interest, prepaid finance charges, and mortgage insurance if they make minimum required payments for the life of the loan. This figure is disclosed on the Disclosure statement and is estimated on any adjustable rate transaction.

Q. The statement says that if the loan is paid off early, the borrower will not be entitled to a refund of the finance charge. What does this mean?
A. This means that they will be charged interest for the period of time in which they used the money loaned to them. Your prepaid finance charges are not refundable. Neither is any interest which has been paid. If the applicant pays the loan off early they will generally not have to pay the full amount of "finance charges" on the disclosure. This charge represents the full amount the loan would cost them if the minimum required payments were made each month through the life of the loan.

Q. Why must applicants sign the initial Disclosure Statement?
A. The lender is required by law to provide the information on this statement to them in a timely manner. Their signature merely means they have received this information, but it does not obligate the applicant to use the lender or lock in an interest rate/loan program.

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