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.
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.
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.
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.
Last revised: Dec 12, 2017