The Truth–In–Lending statement (TIL) is a tool that was developed for borrowers (that would be YOU) to determine if company A has a better loan offer than company B, C, or D. The philosophy behind this statement is strictly based on one box at the top left hand corner of the statement labeled Annual Percentage Rate.
The philosophy is as simple as the higher (APR) determines the worst offer and the lower (APR) determines the best. Or is it that simple?
What is the TIL for?
The statement combines all the bank fees with the APR they quoted you and how long your loan is for, and they come up with a “real” APR… this is more like what the bank is really making from the loan.
How is it calculated?
The way the APR is determined is with a very complex formula. In short, the formula developers were able to separate your pay off (for a refinance) or your sale price minus your down payment (for a purchase) from all closing costs that affect the APR. This way all of the financial institution’s charges are figured separately and they can be weighed. The formula spreads these charges over the life of the loan which results in a higher rate than the interest rate that was quoted to you (Example: You could have been quoted 5.75% but you’re APR shows 6.424%). The note rate is also taking into account in the formula. So in essence, the higher the APR, the more you are paying for that one transaction, through both the quoted rate and closing costs.
Why is it different than my Good Faith Estimate?
Now, in the last article we covered Good Faith Estimates (GFE), and how they can change. The Good Faith Estimate is the document that lists all of your estimated closing costs. This is important because that is the number that is carried over to the Truth–In–Lending formula.
There are only certain fees on the GFE that affect the APR. These fees include Private Mortgage Insurance or FHA Mortgage Insurance Premium (when applicable) and Prepaid Finance Charges (loan discount, origination fees, prepaid interest and other credit costs).
Not so simple…
So you may have noticed my question to you above, “is it that simple”. No, it’s not! You can’t just make your decision based on that one APR number. You have to look at what makes that number fluctuate. The 2 things that make the APR fluctuate, are the quoted interest rate on the GFE, and those specific closing costs on the GFE.
When you compare Good Faith Estimates from different companies, all you’re really looking for is consistency. Many lenders have fees that are the same, or close to each other. Some lenders have fees that others do not have. If you look at 3 or 4 Good Faith Estimates you will start to see consistencies in some fees and inconsistencies in others. The fees that are inconsistent are the ones you want to focus on. Ask the lender, why is this fee here? Why do you have this fee and company B doesn’t? By taking your time and studying these GFEs you will possibly find errors which make your APR higher or lower.
Remember, the APR is just a number. You have to study the Good Faith Estimate in order to determine if the fees and the quoted interest rate that make up the APR are consistent and reasonable.
Note: Never compare Truth – In – Lending statements from different products! It is like comparing apples to oranges.
For Example: Do not compare a TIL for a 15 year mortgage with a TIL for a 30 year mortgage. The products of comparison must remain the same.
I hope this helps you wade through all the information in your loan quotes!
Mortgage Loan Originator
Florida Credit Union
office 352-377-4141 Ex. 1-4098