Truth In Lending Explained

The Truth in Lending Act, which requires creditors to disclose in writing certain cost information, such as the annual percentage rate (APR), before consumers enter into credit transactions.

ANNUAL PERCENTAGE RATE

The cost of your credit at a yearly rate

FINANCE CHARGE

The dollar amount the credit will cost you

AMOUNT FINANCED

The amount of credit provided to you or on your behalf

TOTAL OF PAYMENTS

The amount you will have paid after you have made all payments as scheduled

A %
$ B
$ C
$ D

Q. What is Truth-In-Lending Disclosure and why do I receive it?

A. The Disclosure is designed to give you information about the costs of your loan so that you may compare these costs with those of other loan programs or lenders.

Q. What is the ANNUAL PERCENTAGE RATE? (Box “A” Above)

A. The Annual Percentage Rate (APR) is the cost of your credit expressed as an annual rate. Because you may be paying loan discount ‘points’ and other ‘prepaid’ finance charges at closing, the APR disclosed is often higher than the interest rate on your loan. This APR can be compared to the APR on other loan programs to give you a consistent means of comparing rates and programs.

Q. Why is the ANNUAL PERCENTAGE RATE different from the interest rate for which I applied?

A. The APR is computed from the Amount Financed and based on what your proposed payments will be on the actual loan amount credited to you at settlement. In a $50,000 loan with $2,000 Prepaid Interest Charges, a 30 year term, and a fixed interest rate of 12%, the payments would be $514.31 (principal and interest). Since the APR is based on the Amount Financed ($48,000), while the payment is based on the actual loan amount given ($50,000), the APR (12.553%) is higher than the interest rate.

Q. What is the FINANCE CHARGE? (Box ‘B’ Above)

A. The Finance Charge is the cost of credit expressed in dollars. It is the total amount of interest calculated at the interest rate over the life of the loan, plus Prepaid Finance Charges and the total amount of any required mortgage insurance charged over the life of the loan.

Q. What is the AMOUNT FINANCED? (Box ‘C’ Above)

A. The Amount Financed is the loan amount applied for, minus the Prepaid Finance Charges. Prepaid Finance Charges include items paid at or before settlement, such as loan origination, commitment or discount fees (‘points’), adjusted interest, and initial mortgage insurance premium. The Amount Financed is lower than the amount you applied for because it represents a NET figure. If you applied for $50,000 and the Prepaid Finance Charges total $2,000, the Amount Financed would be $48,000.

Q. Does this mean I will get a smaller loan than I applied for?

A. No. If your loan is approved in the amount requested, you will receive credit toward your home purchase or refinance for the full amount for which you applied. In the example above, you would therefore receive a $50,000, not a $48,000 loan.

Q. What is the TOTAL OF PAYMENTS? (Box ‘D’ Above)

A. This figure represents the total amount you will have paid if you make the minimum required payments for the entire term of the loan. This includes principal, interest, and mortgage insurance premiums, but does not include payments for real estate taxes or property insurance premiums.

Q. My Disclosure says that if I pay the loan off early, I will not be entitled to a refund of part of the finance charge. What does this mean?

A. The means that you will be charged interest for the period of time in which you used the money loaned to you. Your prepaid finance charges are generally not refundable, nor is any interest which has been already paid.

 

 

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