A Truth in Lending disclosure statement is one of the more important documents in the mortgage process. It is designed to help borrowers understand their borrowing costs in their entirety. Federal law requires that lenders provide a Truth in Lending (TIL) document to all loan applicants within three business days of receiving a loan application, disclosing all costs associated with making and closing the loan.
Here is a breakdown of the some of the charges you may find on your Truth in Lending statement and what they mean:
Annual percentage rate:
The annual percentage rate (APR) is the “cost of credit” or the amount you will pay for the credit provided to you through the loan. APR is calculated at a yearly rate. It includes not only your contractual interest rate, but also any prepaid finance charges paid during or before the loan’s closing – such as origination points, service fees or credit fees, commitment or discount fees, buyer’s points, finder’s feels, etc. – as well as any private mortgage insurance (PMI). PMI is generally required if you put less than 20 percent down on a home. Note that the APR shown on the TIL disclosure statement always exceeds the quoted interest rate because of the additional items noted above. In essence the APR reflects the true cost of your loan.
The finance charge also calculates the cost of credit, however this figure is expressed in dollars rather than a percentage. Like the APR, the finance charge includes the total amount of interest incurred over the loan’s lifetime, plus any prepaid finance charges and mortgage insurance premiums.
The amount financed represents the loan amount minus any prepaid finance charges. The amount financed is important because it provides you with a clear, accurate assessment of the total amount of credit provided through the loan.
Total of payments
The total of payments indicates the total amount you will pay over the course of the loan if you make all required payments. This includes the principal, interest and private mortgage insurance (if required), but not your real estate tax premiums or monthly property insurance payments.
The payment schedule includes the following information: number of payments, amount of payments, and when payments are due. Keep in mind that the amount of payments does not include payments for real estate taxes or property insurance premiums. If you have an Adjustable Rate Mortgage, the payment schedule will reflect the payments due based on any adjustments. If you have mortgage insurance, the payments may that reflected as well.
Your Truth in Lending statement will contain a number of additional disclosures below the payment schedule information. Some of these may include whether or not your loan has a demand feature and / or a variable rate feature. A demand feature allows the lender to demand payment of the loan for any reason. A variable rate feature means that your interest rate is not fixed and may change. This essentially indicates that you have an adjustable rate mortgage. There is also a section on the Truth in Lending statement that details the late charge terms. This line will tell you when you will be charged a late fee and how much that fee will be.
Another important disclosure to look for is called prepayment. There are two lines under prepayment. The first tells you whether or not you have to pay a penalty if you pay your loan off early. (Remember this fee could apply if you chose to refinance your mortgage or sell your home before the end of your loan term.) The second line states that if you pay the loan off early, you are, unfortunately, not entitled to a refund of part of your finance charge. Basically, this means that you will pay interest for the period of time in which you use the loan and any previously paid finance charges are non-refundable.
Buying a home is a huge decision. If you have any questions about your Truth in Lending disclosure statement, be sure to ask our lender.