Posted by Hugh Nations Signing Agents of Austin on 7/25/10 4:19pm
Msg #346241

That Amount Financed section of the TIL

From the borrowers' perspective, of what value is the Amount Financed portion of the TIL? It seems to me they are interested almost exclusively in how much they owe and are going to have to pay back; at least, that has been my experience in my eight years as a signing agent and my couple of years as a reverse mortgage loan officer. The borrowers I have encountered would be much more interested in having the amount of the note on the TIL. I don't even try to explain it to them anymore, unless they specifically ask.

Any thoughts from the vast teeming hordes of you who have far greater insight than I do?

Reply by Lee/AR on 7/25/10 4:43pm
Msg #346243

Weeeellll... to answer your question: No value--it started out to be 'a way to accurately compare one loan to another'...but got lost along the way. However, it's federally mandated, so it plods along muddying the waters. Personally, I like the newer Clarity Commitment that some lenders include.

Reply by James Dawson on 7/25/10 4:47pm
Msg #346244

Looks like a loaded question to me since each borrower would most likely have their own views about this. Even when trying to explain this when asked to you get mixed reviews and obvious very visible glassy eyeball question marks......

http://www.occ.treas.gov/handbook/til.pdf

Reply by MichiganAl on 7/25/10 5:48pm
Msg #346249

I think it has some value at the beginning of the loan process if a borrower plans on shopping lenders and comparing terms. At the closing, not so much. I do still take 15 seconds give them a general idea of an APR because it can confuse a lot of people if they're looking at their loan documents after the closing and don't understand it. I've had a lot of people at closing tell me they called their loan officer after seeing the APR in their initial disclosures because they were confused or thought they weren't getting the rate they were expecting. And many people have thanked me for educating them on something that previously baffled them.

Reply by Susan Fischer on 7/25/10 5:49pm
Msg #346250

I maintain my standard synopsis to at least get across

the Loan minus some fees = Amount Financed. Especially for those borrowers
in their first rodeo. Short and sweet reason why the APR is not the Interest Rate.

JMHO, and respect for others' ways.

Reply by anotaryinva on 7/25/10 6:27pm
Msg #346254

Re: I maintain my standard synopsis to at least get across

Just what exactly is your short and sweet explanation of the higher interest rate as reflected in the
APR and the lowered amt of the loan. I generally tell the bo's this is a tool to compare rates amongst lenders and that the apr takes all costs involved with the loan and that the loan amt is subtracting those costs. If they want further clarification I tell them to call their LO. I would really like an easy way to explain this.

Reply by Hugh Nations Signing Agents of Austin on 7/25/10 6:44pm
Msg #346256

Re: I maintain my standard synopsis to at least get across

***I would really like an easy way to explain this.***

My spiel:

"The APR includes both the interest you will pay and some of the other costs, so it's going to be higher than your actual interest rate. This is the TRUE cost of your money, and that figure is one of the major reasons federal regulations require that you be given this form.

"This [the Amount Financed] is normally of interest only to your lender (and, right or wrong, I leave it at that. I've never had a borrower want to go beyond that -- which is good, because otherwise I'd have to tell them to call their loan officer)."

Which leads me to my next question: On a variable rate loan, why can the APR be lower than the interest rate?

Reply by PAW on 7/25/10 7:00pm
Msg #346257

Re: I maintain my standard synopsis to at least get across

Maybe the following dialog (from 2008) on the "MyFICO" discussion board will help.

Re: APR lower than interest rate?
----- ----- ----- ----- ----- -----
Original question:

I'm doing some research since we are going to be looking to refinance our home in the fall. I was looking at Penfed and they have a 5/5 ARM (we plan on being there 2-3 more years, perhaps) that has a 5.375% rate and a 3.388% APR. How does that work? How do I calculate what monthly payments be?
----- ----- ----- ----- ----- -----
Answer provided:

I've seen this before, and it's really confusing. I'll see if I can explain it.

First things first, your payment for the first 5 years is going to be based on that interest rate. Use any mortgage calculator online, put in the amount to be borrowed, amortization period, and the 5.375 interest rate. For a $100,000 loan amortized over 30 years, the monthly payment would be $560.

For ARMs, you should be aware that the adjustable part of the loan is based on some "index". Examples of indices are the 1-year LIBOR or the prime rate. The lender uses one of these and then adds a "margin" on top of it. For example, an ARM that adjusts every year might be tied to the 1-year LIBOR. The lender might state that on the day the interest rate adjusts, the new interest rate will be the 1-year LIBOR + 2%. Today's 1-year LIBOR rate is 3.17625%, so if an ARM were to adjust today, the new interest rate would be 5.17625% (usually rounded up to the next 1/8 point, so 5.25%).

The index used to calculate the interest rate on an ARM usually follows closely with the term of each adjustable period. If the interest rate adjusts once a year, then the 1-year LIBOR would typically apply. If it adjusts every month, then the 1-month LIBOR would be used. If it adjusts every 5 years, then the 5 year treasury note would apply.

When calculating the APR on an ARM, the lender cannot just base it on the initial offered rate. Government rules prohibit this, because otherwise an unscrupulous lender could offer a ridiculously low teaser rate for 3 months and then have it skyrocket thereafter. If the APR were calculated on the teaser rate, then it would not reflect the true cost of the loan over its lifetime.

As a consequence, PenFed has to take into account both the current rate and what the rate might be after 5 years. Of course, they don't have a crystal ball, so when calculating the APR they look at the value of the index now and just assume that it will be the same 5 years from now. Clearly, that won't necessarily be the case, especially since we have to assume that the central bank is going to adjust rates upwards as inflationary pressures increase.

So how does this affect the APR? The first 5 years of the loan will have an interest rate of 5.375%. But when you look at the index that will be used to calculate the variable part of the loan, the index-plus-margin at today's rate would be less than the initial rate. That is what is used to calculate the APR for this loan, and since the adjusted interest rate would be lower than the initial rate, it causes the APR to drop below the initial interest rate. It is impossible to calculate a definitive APR because of the variable nature of the loan, but this is the best that can be done given the amount of uncertainty inherent to the credit markets.

This is really confusing, and I'll have to go over my post a little later to make sure that I've got it right. I hope this helps a little.

Reply by MichiganAl on 7/25/10 7:14pm
Msg #346259

Whew, that's the long version

My easy version for the borrower when the APR is lower: APR factors in the adjustable rate. Based on today's LIBOR, your payments would go down (which I can point to on the TIL as it shows the projection). Then I give the brief disclaimer that of course no one can say what the index will be in the future, etc., etc...

Reply by GA/Atty on 7/25/10 6:27pm
Msg #346255

I think the most important number on the TIL is the APR....

and the Amount Financed is one of the components used to calculate the APR.

So, while I sort of agree that the Amount Financed isn't very interesting for its own sake, you can't explain how the APR is calculated without referencing it.

Reply by anotaryinva on 7/25/10 7:02pm
Msg #346258

Re: I think the most important number on the TIL is the APR....

I think I'll leave at ~ it's always higher (apr vs interest rate) and always lower (amt financed vs. loan amt). I usually say, let's have a look at the note, that is where you will find the actual numbers . Luckily many of my bo's are lawyers/engineers/cpa's and I can tell them that these forms are prepared by people ljust like them ~ that's why they are confusing ~ they almost always agree.

Reply by JanetK_CA on 7/26/10 1:49am
Msg #346268

Re: I think the most important number on the TIL is the APR....

I always find it flows much easier if I have them look at the Note before I show them the TIL. By the time they see the APR, I've already pointed out to them their actual interest rate.

Reply by Blueink_TN on 7/26/10 8:44pm
Msg #346361

The Amount Financed represents your loan amount less certain fees paid at loan settlement such as the origination fee, discount points, per diem interest, and any mortgage insurance premiums.

This came up tonight. As some of you recall, I am now a licensed loan officer. First month and my second loan closed tonight!! Anyways, my client called and asked why his wife's name was 'all over the documents'. I explained the non-borrowing spouse signature docs because TN is a community property state, yada yada yada. I also had to explain this to the NSA. Sigh. Then the phone rings again with the TIL questions.... Oh, to be on the other side of the fence!