Explanation of TIL and APR
Explanation of Closing Disclosure
In comparing any type of loan, whether it is a fixed rate loan to a fixed rate loan, adjustable rate loan to adjustable rate loan, or fixed rate loan to adjustable rate loan, there is one way that can be used to compare apples to apples and even apples to oranges.
APRs are designed to do just that. APRs are a way to calculate the annual cost of loans, taking into consideration loan origination fees (points) and the other costs associated with securing a loan. The additional costs include appraisal and credit report fees as well as processing and document fees.
One confusing aspect of APRs is that the APR on 15-year loans will carry a higher relative rate due to the fact that the points are amortized over the 15-year term rather than the 30-year term. When a Regulation Z (Reg Z, the mortgage companies disclosure of cost for the loan) is prepared for a buyer/borrower the prepaid interest is also included in the APR calculation. For our illustrations we will use only the points, appraisal, credit report, and processing and document fees. *
As a means of protecting consumers from companies who did not disclose the fees associated with a particularly low start rate on an adjustable rate loan or below market rate on a fixed rate loan, APRs give consumers a way to check the true cost of a loan.
Let’s look at how APRs are calculated. For our illustration we will assume a 8.50% fixed interest rate. For a 30-year loan the monthly payments for a $150,000 loan are $1,153.37.
In order to calculate the APR for this loan we subtract $2,250.00 (1.50 points), $275.00 appraisal fee, $50.00 credit report fee, $500.00 processing, document and other fees. ($150,000 – $3,0750 = $146,925). The $146,925 is then used as the present value/loan amount to determine the true cost of this loan. By solving for the new interest rate for a $146,925 loan with the same payment of $1,153.37, the APR is calculated as 8.73%.
How does this compare to a 30 year fixed rate loan with a 8.00% interest rate and 3.50 points? The monthly payment for this loan is $1,100.65.
In order to calculate the APR for this loan we subtract $5,255.00 (3.50 points), $275.00 appraisal fee, $50.00 credit report fee, $500.00 processing, document and other fees. ($150,000 – $6,075 = $143,925). The $143,925 is then used as the present value/loan amount to determine the true cost of this loan. By solving for the new interest rate for a $143,925 loan with the payment of $1,100.65 the APR is calculated as 8.44%.
To better understand how this calculates, plug in these numbers in POINT, ensuring that the “Prepaid Finance Charge” items are checked. Go to the Closing Disclosure statement and click calculate to get the APR.
* This is for illustration purposes only. For an accurate list of what affects the APR, see below:
Escrow Waiver Fee
Mortgage Insurance Premium
Per Diem Interest
Tax Service Fee
Does NOT Affect APR
Credit Report Fee
Credits to Closing Costs
– (Except Mortgage Insurance)
Final Inspection Fee
Homeowner’s Insurance Premium
Re-certification of Value
Wire Transfer Fees