You may have heard the terms “APR” and “Truth-in-Lending,” but what exactly do these concepts mean? And how does this information apply to you as a consumer and borrower?
The Truth-in-Lending Act
The Truth-in-Lending Act (TILA) is one of the most critically important consumer protection acts in the mortgage business. In order to protect consumers, it requires complete disclosure of all credit terms, the consumer costs of obtaining credit, and the rules that will protect consumers when they borrow using a home as collateral.
Truth-in-Lending regulation has a noble purpose. It is designed to allow the borrower to comparison shop loan programs and the overall cost of credit while providing protection from inaccurate and unfair advertising. Unlike the “Good Faith Estimate” which discloses the entire transaction’s cost, Truth-in-Lending deals only with the cost of the loan. TILA was created for the following purposes:
- To protect consumers by requiring the disclosure of all costs and terms of credit
- To create uniform standards for stating the cost of credit, thereby encouraging consumers to compare the costs of loans offered by different creditors
- To ensure that advertising for credit is truthful and not misleading
The Truth-In-Lending Disclosure Statement (TIL) should be given to the consumer at the time of application. If it is not, the lender has three business days from the date of application to mail the disclosure to the borrower.
The Annual Percentage Rate (APR)
One of the most important figures disclosed on the TIL is the APR. The APR calculation may confuse the lenders and buyers alike. “Annual percentage rate” sounds a lot like “interest rate” to most borrowers. The APR is not an interest rate, but a theoretical measure of the cost of credit expressed as a percentage rate. The purpose of the APR is to provide consumers with a uniform measure of the cost of a loan. The APR equation includes the contract interest rate and adds the costs of the loan, including any prepaid costs (points, fees, etc.) that are part of the cost of borrowing. Ideally, borrowers can compare costs from company to company by comparing the APR.
ANNUAL PERCENTAGE RATE
TOTAL OF PAYMENTS
The cost of your credit as a yearly rate
The dollar amount the credit will cost you
The amount of credit provided to you or on your behalf
The amount you will have paid after you have made all payments as scheduled
The APR Formula:
1) Compute total of payment by multiplying payment schedule, including PMI by amount of payments.
2) Amount Financed is the loan amount, less points, prepaid interest, PMI, and lender fees
3) Finance Charge is the Total of Payments less the Amount Financed
4) Compute the APR by dividing the Total of Payments by the number of payments and apply that against the Amount Financed, as if it were the loan amount
The first step in determining an APR is to subtract the prepaid finance charges from the loan amount. The result is the “amount financed.” Next, the full principal and interest payment (including Private Mortgage Insurance or PMI ) is applied against the “amount financed” as if it were the loan amount. The resulting interest rate is the APR.
What are Finance Charges?
A prepaid finance charge is any charge one must pay in exchange for obtaining a loan (charges you would not incur if you were paying cash for the property). Like the APR, it can be used by consumers as appoint of comparison between lenders. Finance charges include loan fees (discount points, origination few, PMI) and miscellaneous fees (tax service, underwriting, document preparation, or lender review few).
In addition, some prepaid items such as per diem interest and escrows for PMI or prepaid PMI, FHA upfront MIP (Mortgage Insurance Premium), and the VA (Veteran’s Administration) funding fee are considered finance charges. Other prepaid items, such as association dues, are not included.
Appraisal and credit report fees are not included when they are collected as part of an application fee. Any inspections (termite, well, septic, etc.) that are required by lenders are not considered finance charges. Fees for recording a deed of trust are not included either. The only exception is a construction loan draw inspection.
There are a number of third party fees involved with the finance charge; Regulation Z (12 CFR 226.4(b).) lists the following charges from third parties as examples of fees that the creditor must include when calculating the finance charge:
- Interest, time-price differential, and any amount payable under an add-on or discount system of additional charge
- Service, transaction, activity, and carrying charges
- Points, loan fees, assumption fees, finder’s fees, and similar charges
- Investigation and credit report fees
- Premiums on insurance protecting the creditor against the consumer’s default
- Charges imposed on a creditor by another person for purchasing or accepting a consumer’s obligation
- Premiums or other charges for credit life, accident, health, or loss-of-income insurance, written in connection with a credit transaction
- Premiums for homeowner and liability insurance written in connection with a credit transaction
- Discounts to induce payment by a means other than the use of credit
- Debt cancellation fees
There are also a number of fees that are excluded from the finance charge:
- Application fees charged to all applicants for credit
- Charges for unanticipated late payments, exceeding a credit limit, or delinquency
- Charges imposed by a financial institution for paying items that overdraw an account
- Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis
- Seller’s points
- Interest forfeited as a result of an interest reduction required by law on a time deposit used as security for an extension of credit
- Real-estate related fees such as fees for title examination, charges for the preparation of loan documents, credit report fee, notary fees, appraisal fees, and amounts paid into escrow, if these fees are bona fide and reasonable
- Discounts offered to induce payment by cash, check, or other means
Insurance and debt cancellation coverage can also be excluded if the coverage is not required by the creditor, the premium for the initial term of insurance is disclosed, and the consumer signs or initials a written request for the insurance. If itemized and disclosed, certain taxes and fees prescribed by law are also excluded from the finance charge.
Explaining the amount financed would be much simpler if each loan came with an “itemization of amount financed.” The itemization would include a detailed list of the loan amount, the payment schedule, and each finance charge.
Another factor in calculating your APR is the payment schedule. To determine the payment amount to apply against the amount financed, divide the total of payments by the number of payments and use this average amount. On a fixed-rate loan, the payment schedule is quite simple-the monthly payment is the same through the life of the loan. Variable payments (as in an ARM, Buydown, GEM, or GPM) may be more complicated on a payment schedule. The APR or ARMs can change based upon future interest rate changes. Buydowns, GPMs, and GEMs have fixed payment schedules, so the APR on these loans will not change.
After the APR, amount financed, and total of payments have all been calculated, what is the total finance charge? The difference between the total of payments and the amount financed represents the cumulative total of all interest and prepaid finance charges accrued on the loan, or the total finance charge. Subtracting the amount financed from the total of payments reveals this number.
Call us at 805.543.LOAN to talk to a loan officer if you have any questions about TIL or APR. The Mortgage Experts are here to help!
Central Coast Lending is a California mortgage broker and direct lender based on the Central Coast of California in San Luis Obispo County. Call 805.543.LOAN to set up a free pre-qualification.
Fannie Mae announced in mid-December 2014 that they would be offering a brand new low down-payment option for homebuyers. This new policy—referred to as the “expanded LTV” program by Fannie Mae—allows for loan-to-value (LTV) ratios greater than 95%, and a maximum of 97% LTV. The program was implemented the weekend of December 13, 2014.
The new 3% down program was created with the goal of assisting first-time homebuyers who may have the qualifications to receive a Conventional loan, but do not have the resources to front a 5% or higher down-payment. While the program is geared toward loans in the MyCommunityMortgage (MCM) program, first-time buyers not qualified for MCM are also eligible for the 3% down option.
Pundits often question the rationality of lowering down payment requirements so soon after the Great Recession was driven by loose mortgage lending guidelines. When asked how 3% own payments promote responsible borrowing, Daniel Podesto, CFO for Central Coast Lending, is quick to point out the radical difference in home prices since “responsible” lending guidelines were implemented with the formation of Fannie Mae in the 1930s. “In California and many other coastal real estate markets, where homes cost upwards of $500,000, a three percent down payment is $15,000 plus closing costs plus impounds. That’s $25,000 to buy a home.” Podesto continues, “This isn’t 1950 where homes cost $25,000 and a twenty percent down payment was only $5,000, or 1980 for that matter when homes cost $200,000 and a twenty percent down payment was $40,000. Wages have not risen commensurate with home prices during that time period so the reduced down payment requirements keep homeownership affordable.”
Current homeowners with an existing Fannie Mae loan are also able to take advantage of the new program in order to refinance their home. Homeowners whose homes have lost value, but were unable to qualify for the Home Affordable Refinance Program (HARP), may be eligible for the 3% down option.
There are certain criteria in order to qualify for Fannie Mae’s new loan program. The loan must be a fixed-rate loan with a term of up to 30 years, and high-balance, adjustable-rate, and HomeStyle Renovation loans are not permitted. The property in question must be a one-unit principal residence, meaning single-unit homes that are primary residences. Multi-unit homes, vacation homes, and manufactured housing are not allowed with this program. For homebuyers, at least one borrower must be a first-time buyer in order to be eligible for the 3% down option. MCM loan participants must have an income concurrent with the median income limits listed in Fannie Mae’s Selling Guide. There are, however, no income limit requirements for non-MCM borrowers. MCM borrowers must have 18% mortgage insurance coverage, but non-MCM borrowers need 35% mortgage insurance coverage. Additionally, for those eligible for MCM loans, Fannie Mae is also allowing reserves to come from gifts (read more about gift giving guidelines in our FAQ section).
Some who are familiar with Fannie Mae’s options may wonder if the current “expanded LTV” program is simply a revival of the Conventional 97 program that was retired in 2013. However, this new version of the 97% LTV option differs from the Conventional 97 program, as it is more forgiving toward homebuyers and allows homeowners to refinance to today’s mortgage rates.
This new low down-payment option has again leveled the playing field between Fannie Mae and other government agencies who offer loans requiring little or no money down, such as the FHA loan option. It is extremely beneficial for today’s homebuyers to have more options when looking to minimize their down-payment.
Jason Grote, President of Central Coast Lending, reminds homebuyers, “The biggest advantage of this new Fannie 97 program over FHA is that the mortgage insurance can be removed when the LTV reaches 78%, either by principal pay-down or home value appreciation, unlike FHA mortgage insurance which remains in place for the life of the loan.”
Call us at 805.543.LOAN to talk to a loan officer and determine if this new program is right for you!
Central Coast Lending is excited to announce loosened gift giving guidelines for down payments of conventional loans, which includes the popular 30-year and 15-year fixed loan programs.
Mortgage insurance is a monthly fee that is built into your monthly loan payments. Luckily, borrowers have the ability to refinance their loan and eliminate or reduce mortgage insurance fees, thus saving up to hundreds of dollars on monthly payments. Read more
High interest rates continue to decrease the demand for refinancing loans, leading to a decrease in mortgage applications. Purchase applications rose by 1.0 percent, but refinancing applications continued to decline and are now at a 2-year low after decreasing by 4.0 percent.
Additionally, when looking at the adjusted index of mortgage application activity, which includes refinancing and purchase applications, there was an overall decrease of 2.6 percent in the week ended July 12.
Although mortgage rates have seen sharp increases in the last two months, the July 12 week did not. The average 30-year mortgage rate for conforming loans remained unchanged at 4.68 percent.
The Department of Housing and Urban Development (HUD) has altered the fee structure for FHA loans, which increases the annual “mortgage insurance” payment. The changes went into effect on April 1, 2013 and June 3, 2013.
Jobless claims increased by 16,000 to a seasonally adjusted 360,000. However, seasonal factors, such as factories in the auto sector shutting down regularly in July for retooling, make this week and all weeks in July hard to read.
Even with this increase in initial claims, layoffs are still consistent with our dropping unemployment rate and remain within the range of levels seen over the past year.
Additionally, when looking at the four-week moving average of new claims, there was a more modest increase of 6,000 to 351,750. This four-week average is considered a better measure of labor market conditions.
Results for continuing claims for the June 29 week are mixed. Continuing claims rose 24,000 to 2.977 million. However, the 4-week average is down 3,000 to a new recovery low of 2.971 million.
With 195,000 jobs added to payrolls in June, the U.S. labor market has shown signs of strength in recent weeks. This also points toward strong expectations that the Fed will start winding down its massive stimulus program as early as September.
For the ninth week in a row, interest rates on fixed 30-year mortgages have jumped. During the the week ending July 5, the 30-year fixed rose to an average 4.68 percent, according to the Mortgage Bankers Association. This was a 10 basis point increase over the week before and the highest level since July of 2011.
Rising mortgage rates continue to decrease demand for mortgage applications. For the July 5 week, the purchase index was down 3.0 percent while the refinance index was down 4.0 percent.
Higher mortgage costs have raised concern that the housing recovery may slow. However, economists do not expect the recovery to be derailed, as rates remain historically low despite the recent increase. (And we agree… see: The Future of Mortgage Rates and the Housing Market in 2013)
Initial claims dropped 9,000 to 346,000 for the June 22 week which is right around market expectations. The month-ago comparison is slightly lower, with the 4-week average down 2,750 to 345,750. So, although the general trend for jobless claims is favorable, the improvement is far from dramatic.
Similarly, continuing claims showed slight improvement dropping 1,000 to 2.965 million for the June 15 week. Additionally, the 4-week average is down 10,000 to 2.973 million. This is just off the recovery best of 2.972 million which was posted in the June 1 week.
However, the unemployment rate for insured workers is unchanged. The rate remains at a recovery low of 2.3 percent.
According to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey, mortgage applications decreased 3.0 percent from one week earlier, falling to its lowest level since November 2011.
The Refinance Index fell 5.0 to the lowest level since November 2011.
Purchases, however, increased by 2.0 percent from the previous week. The unadjusted Purchase Index increased 1.0 percent from last week and was 16 percent higher compared to the same week one year ago.
The data reflects the recent rate hike, and we would expect to see a further drop in refinance applications moving forward. Purchases may prove to be more resilient, but if rates continue to rise, we would expect to see less demand for the housing market in general.