 Sam
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 Posted: Sat Apr 03, 2004 5:50 am Post subject: Why is the APR on TIL disclosure higher than mortgage rate? |
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The Annual Percentage Rate (APR) represents the cost of a mortgage loan expressed as a yearly rate of interest. The APR is calculated in a standard way, taking into account the average compound interest rate throughout the loan term. This helps borrowers to compare different types of mortgage loans before they can choose the right one.
The Truth-in-Lending (TIL) Disclosure is a written statement that provides information on the APR, the mortgage loan amount, the total payments for the loan and other loan fees. Under the Truth-in-lending Act, lenders are required to disclose the costs related to the mortgage within 3 days of receipt of loan application. Although this Disclosure is a rough estimate of the loan fees, yet it gives an idea of the costs associated with the mortgage loan.
The mortgage note on the other hand, refers to the promissory note which is a written document signed at closing. The note states the amount of loan and rate of interest and obligates you to repay the loan amount at the specified rate of interest.
The APR on the Truth-in-lending disclosure is generally higher than the interest rate stated on the mortgage note. This is because it is calculated by taking into account not only the interest payments but also the following costs:
- Discount point:
It includes the cost paid by a borrower in order to lower the interest rate on mortgage loan.
1 discount point = 1% of the loan amount.
- Private mortgage insurance (PMI) premiums:
These premiums make up the cost of purchasing a private mortgage insurance policy which protects the lender from a monetary loss due to any default by the borrower.
- Other closing costs:
These include other loan fees like the origination fee, loan processing fee, underwriting fee, etc. Such closing costs mainly deal with originating and processing the loan along with analyzing the risk in offering the mortgage.
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