Borrowers often are confused by the truth-in-lending statement which must be signed as part of almost every residential real estate loan.
The statement shows an annual percentage interest rate (APR), which is higher than the interest rate in the note.
For example, the interest rate on a 30-year, fixed-rate mortgage may be 6 percent, but the APR would be slightly higher.
Why?
The APR is higher than the interest rate specified in the note because it includes the lender's loan fees for items such as origination, underwriting, processing and other charges. These fees often will equal 1 percent to 2 percent of the loan amount. The fees are paid at closing. The borrower either pays them, or they are included in the loan. These fees are considered a cost of credit, just like interest. The lender's fees are considered as additional interest in determining the APR.
In shopping for a loan, borrowers always should obtain a written disclosure of all lender's fees. High lender fees may offset a lower interest rate. Lenders are required to provide a good faith estimate of their fees.
A loan customer should insist on seeing a good-faith estimate before giving the lender any nonrefundable loan application payment.
