DEFINITIONS OF TRUTH-IN-LENDING TERMS
The following are definitions of some of the terms which are used in
Truth-in-Lending disclosures which are required by federal law. The disclosures
are provided to enable an applicant to compare the mortgage terms of various
lenders.
Prepaid Finance Charges:
PREPAID FINANCE CHARGES are those direct loan charges, paid by the borrower (not
a third party), that are required by Truth-in-Lending regulations to be
included in computing the Annual Percentage Rate. They include, but are not
limited to: loan origination, discount, and commitment fees; prepaid private
mortgage insurance premiums (PMI); prepaid FHA mortgage insurance premiums
(MIP); VA funding fee; underwriting, processing, tax service, and messenger
fees, if paid to the lender; buydown and shortfall funds; and prepaid interest.
Annual Percentage Rate (APR):
The APR is not the same as the note interest rate, if there are any PREPAID
FINANCE CHARGES or buydown fees paid by the borrower. The APR takes into
account all of these charges and fees and gives the applicant(s) a way to
measure and compare the effective annual interest cost of the loan.
Finance Charge:
The total cost of credit as a dollar amount. It is the total of PREPAID FINANCE
CHARGES plus the total interest and mortgage insurance premiums, if any, which
would be paid over the life of the loan, if paid according to the Payment
Schedule. If the loan is based upon an adjustable rate of interest, the FINANCE
CHARGE will be subject to change if the interest rate varies.
Amount Financed:
This is not the loan amount. It is the amount requested as a loan by the
applicant (including any MIP which is to be financed), less applicable PREPAID
FINANCE CHARGES paid at closing.
Total of Payments:
This amount is usually the total of the Finance Charge and the Amount Financed.
It is the total of PREPAID FINANCE CHARGES, plus principal, interest and
mortgage insurance premiums, if any, which would be paid over the life of the
loan, if paid according to the Payment Schedule. If the loan is an adjustable
rate mortgage, the amount may be subject to change if the annual percentage
rate changes.
Payment Schedule:
The payments indicated include only principal and interest (and if applicable,
mortgage insurance premiums). The amounts do not include payments into escrow
for homeowners insurance or property taxes. If the loan is a variable rate
transaction in which the initial interest rate is not determined by the index
or formula used to make later interest rate adjustments, the Payment Schedule
must reflect a composite APR based on the initial rate for as long as it is
charged, and for the remainder of the term the rate that would have been
applied using the index or formula at the time the loan closes. The effect of
any rate or payment caps are reflected in the Payment Schedule. If the loan is
a variable rate transaction in which the initial interest rate is determined by
the same index or formula used to make later adjustments, then the Payment
Schedule is prepared on the assumption that the rate used will not vary over
the life of the loan.
The above definitions are intended to assist the applicant(s) in better
understanding Truth-in-Lending disclosures. The definitions are only intended
to be short summaries. Applicant(s) with legal questions should consult their
own attorney for advice.
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