Truth in lending disclosure statement explained

What does APR mean for mortgage rates?

Woman calling lenders for the lowest interest rateYou shopped for the “lowest” mortgage interest rate. You spoke to more loan officers than a politician running for office; but you finally found a great interest rate. The loan officer provided you with a good faith estimate and explained all the fees associated with the purchase (or refinance). You’re glad all this mortgage stuff is done with. Now all you have to do is wait until the mortgage is processed and go to closing.

But then, after paging through your application papers, you spot a form called “FEDERAL TRUTH IN LENDING STATEMENT”.

On the form is a box titled ANNUAL PERCENTAGE RATE.  WHAT!!! . . . that’s not what the loan officer promised. Infuriated, you’re about ready to suit up like Arnold Schwarzenegger in Commando and have a talk with that loan officer. You were probably thinking he was too smooth, too confident, too reassuring. Must be a thief.

But before you call, read this . . .

Angry woman speaking on a phoneThe annual percentage rate is NOT the loan rate that you will pay on your mortgage loan. The Truth In Lending Disclosure is required under the Truth in Lending Act enacted June 29, 1968. This legislation was designed to prohibit larcenous lending practices (i.e. bait and switch, also known as lying).

Federal Truth In Lending Disclosure Statement ExampleThe APR rate is NOT the interest rate you will be paying on your mortgage or loan ! ! !

This form is required by the federal government and is designed to help you compare mortgage lenders using a formula that “blends” the closing costs into the mortgage rate for illustrative purposes only. For example, let’s say Lender A does not have any closing costs whatsoever, the APR rate and the rate you pay on the mortgage, called effective rate will be the same, but, if Lender B has a LOWER interest rate and high closing costs, the APR rate may be higher than Lender A.

Still confused? Here’s another example:

Let’s say you’re financing a glass of milk for one dollar, the effective interest rate and the APR rate will be the same, because nothing was added to the milk. But what if the restaurant took that glass of milk and added a couple of scoops of chocolate ice cream, and topped it off with a coving of whipped cream, and charged you two dollars? The APR would be higher because of the chocolate ice cream and whipped cream.

One more thing . . .

The APR calculation is different with adjustable rate mortgages and the hybrid mortgages. Hybrid mortgages are loans that are fixed some period of time (i.e. 1,3,5,7 or 10 years) and then adjust annually.

The APR cost calculator will estimate the closing costs between different fixed rate mortgages.
Proceed to the APR calculator