One Rate in the Good Faith Estimate and a Higher Rate in the Truth in Lending Statement

If I have one rate in the good faith estimate and the truth in lending disclosure statement is higher, which rate will be use for my mortgage or should the rate be the same?

2 Answers

The rate in the Good Faith Estimate is the Note Rate. When you borrow money to buy real estate you sign a promissory note at closing. This note is the borrower's promise to pay the loan back and includes the interest rate to be charged on the unpaid balance. Over the term of the loan this interest is part of the finance charge paid to borrow the money.

But interest paid after you receive the loan is not all of the finance charge you may pay to borrow the money. In addition to the interest paid on the unpaid balance in each payment you make after closing, you may also be charged fees at closing -- closing costs. Some of these closing costs associated with the financing are defined by the Truth-in-Lending Act (TILA) as finance charges. TILA requires that lenders disclose not just the interest rate that borrowers pay on the loan after closing, the Note Rate, but also the total cost of the financing expressed as an annual rate. This interest rate, or Annual Percentage Rate, is the one you see in the Truth-in-Lending disclosure. This number includes the interest charged on the unpaid balance each month plus the finance charges paid to obtain the loan.

Here's an oversimplified example. Let's say a borrower takes out a $100,000 loan at 6.0% (the Note Rate). The payment is $600/mo for 30 years. Over the 30 years the borrower pays $216,000 in payments ($600 X 360 months). Of the $216,000 paid on the loan, $100,000 is the principal amount borrowed and $116,000 is interest paid. If there were no closing costs or finance charges paid to take out the loan then the Note Rate and the APR would both be 6.0%.

But what if the lender charged a $1,000 fee at closing to make the same loan as above? In this case the borrower still pays 6.0% on a $100,000 note over 30 years for a total of $116,000 in interest, plus they paid $1,000 in finance charges at closing for a total amount of $117,000 in finance charges paid over 30 years to borrow what amounts to $99,000 ($100,000 less the $1,000 fee). The fact that the borrower must pay back $100,000, but is only getting $99,000 is why the Amount Financed in the TIL is less than the loan amount in the note. So the more finance charges paid to the lender at closing the higher the APR even if the Note Rate remains the same.

In the first example with the lender not charging any finance charges at closing, the Note Rate is 6.00% and the APR is also 6.00%. In the second example the APR is 6.094%. The lender is making the same loan at the same Note Rate of 6.00%, but with a $1,000 fee at closing, which reduces the ****Amount Financed to $99,000. If a lender provided the loan at 6.0%, but charged $2,000 at closing, the Amount Financed would be $98,000 and the APR would be 6.189%. So even though all of these examples have the same Note Rate, the APR increases as the cost of the loan increases.

The note rate is found in every document EXCEPT the Truth In Lending Disclosure or TIL.  The TIL's purpose is to give the consumer a comparison between programs, rate & point offerings etc.  You will also see that the Amount Financed on the TIL is NOT the amount of money you are borrowing.  It is a wash figure that takes the amount you ARE borrowing minus certain closing costs that are considered to be a pre-paid finance charge.  The Annual Percentage Rate or APR is calculated on that amount.  The only way the TIL rate and the note rate will be equal is if the projected closing date is on the first of the month and there is no pre-paid interest AND there are no other closing costs that affect APR such as mortgage insurance, underwriting fees, etc.  In other words, the APR and note rate will NEVER be equal.

Your monthly payments are based on the note rate however.  For example, if the note rate is 5% for a 30 year fixed rate loan, the payment is roughly $536 for a loan amount of $100,000.  If the APR for that loan was 5.15% as an example, the payment would be about 10 dollars higher.  Most people familiar with the TIL will say that it is the most confusing of all of the mortgage application documents.  The APR will not be accurate if ANY pre-payment is made during the term of the loan, either.

So, check your application, check your rate lock disclosure, check your Good Faith Estimate, and check your TIL.  You will find that just like the 'which one does not belong?' questions we all faced on various tests as children that one of the documents contains a 'rate' that is not like all of the others.  At closing, the note you sign has the actual rate, too, and it will be different from the final TIL as well.