The “Truth In Lending Form” Defined

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When scrolling through the heap of documents that we call a buyer’s loan application and disclosure package, the Truth In Lending form (affectionately called the “TIL”) tends to stop many buyers in their tracks.  Why?  Well, the TIL contains no shortage of confusing terms, data and numerical disclosure.  As your Arizona Mortgage Lender, I want to help you!  Let’s run through and explain what the TIL madness is all about:

History of the TIL
The Truth In Lending Act of 1968 (TILA) was enacted to help protect American consumers by requiring full and transparent disclosure of all terms on any credit related transaction.  TILA has consistently been updated by way of various legislation throughout the years.  Most recently, The Housing and Economic Recovery Act of 2008 tweaked TILA and as a result the Truth In Lending Form itself.   Lets break down the main categories on the TIL form.

What is APR?
APR or Annual Percentage Rate is simply a form of disclosure that shows the total cost of the credit being extended to a borrower and it is expressed as an annual percentage rate.  APR includes more than just the interest on a loan.  Although APR is expressed as an interest rate however it is NOT the effective interest rate on a mortgage loan.  In short, APR is a figure that includes the interest paid on a loan plus any pre-paid finance charges incurred by the home buyer.  As a result, APR is typically higher than the actual interest rate on a borrower’s loan.

What is the “FINANCE CHARGE” section?
The Finance Charge section discloses the total cost of credit expressed in terms of dollars.   The finance charge total includes the interest paid on the loan, all pre-paid finance charges and any required mortgage insurance premiums.

What is the “AMOUNT FINANCED” section?
The Amount Financed section represents the mortgage a borrower applied for minus all pre-paid finance charges (origination charges, pre-paid interest and any initial mortgage insurance premiums).  The amount financed will be less than the loan amount that a borrower applied for and it will be lower than the loan that the borrower is receiving.  This is absolutely normal.

What is the “TOTAL OF PAYMENTS” section?
The Total of Payments section represents the dollar total a borrower will pay if they make the minimum required payment for the life of the loan.   This figure includes principal, interest and mortgage insurance.  It does not include property taxes or homeowner’s insurance costs.

There are other section on the TIL that talk about pre-payment penalty, penalty if making a late payment on your loan, your entitlement to a refund and more.  The answers to these sections vary depending upon the type of financing being used.  Please contact me if you have any other questions on how the TIL form works and what each of the sections means.

By Jeremy House


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