It is amazing how a mortgage loan document makes it easier to choose the perfect loan.
Mortgage shopping may feel mysterious and even confusing. To help you better understand the mortgage lender’s loan offer, the law requires Loan Estimates to be included.
The Loan Estimate document makes it easy to compare tomatoes to tomatoes, in this case, one mortgage against another. Every lender has the same Loan Estimate form to make things easier.
Page 3 of the Loan estimate offers three comparisons:
- The total amount you will pay in principal, interest, and other loan costs over five years
- The Annual Percentage Rate (APR)
- The Total Interest Percentage (TIP)
But what is TIP?
Why is the percentage so huge?
And what does a good TIP percentage look like?
Read on to find the answers to these and more questions.
Definition of a Total Interest Percentage (TIP)
After the Dodd-Frank Act Section 1419 amendment of the Truth in Lending Act (TILA), a new section was added that requires creditors to disclose the total amount of interest a residential home buyer is paying.
Another TILA section requires the amount to be computer-generated on the assumption that the buyer makes all monthly payments and without overpayments. The calculation is TIP, which is the total amount of interest you pay over the lifetime of a loan as a percentage of the loan amount.
The Kleiman Testing Report concludes that buyers should use TIP as a measure of what they will pay in interest in the Closing Disclosure.
TIP is the amount of interest in the dollar amount you will pay, depending on the note rate, over a 30-year fixed-rate mortgage, and calculates what percent of the original loan amount you are paying.
How to Calculate TIP
The formula looks like this:
- Principle and Interest x loan term (30 years) = All money you are paying over the loan’s lifetime
- All money you are paying over the loan’s lifetime – the loan amount = All interest you are paying over the loan’s lifetime
- All interest you are paying over the loan’s lifetime / loan amount = %
But there is missing daily interest taken care of by:
- All interest you are paying over the loan’s lifetime + Prepaid interest for when the loan closes = All interest
- All interest / Loan amount = TIP
- Consider this hypothetical situation: you have a $162,000 mortgage for a 30-year term (360 monthly payments), an interest rate of 3.875%, and a $761.78 monthly payment.
The math would look like this:
- 761.78 x 360 = 274,240.80
- 274,240.80 – 162,000 = 112,240.80
- 112,240.80 / 162,000 = 69.28%
- 112,240.80 + 262 = 112,502.80
- 112,502.80 / 162,000 = 69.45% TIP
This means purchasing the home for $162,000 will cost you $162,000 today, and 69.45% more when you finance it for over 30 years.
However, the percentage does not account for items such as repairs, maintenance, inflation, or market conditions. PIN offers you a huge wake-up call of how much more home will cost you over 30 years!
Differences Between APR, Interest Rate, and TIP
The interest rate is how much your home loan will cost you annually. The rate does not offer the total cost of the mortgage you are taking.
The Annual Percentage Rate (APR) includes other charges, such as lender fees, and shows the total cost of borrowing money over the lifetime of the mortgage.
TIP does not consider the upfront fees, but you can add prepaid interest.
The APR and interest rate cover one year. TIP covers a much longer period because it reflects the interest amount you are paying over a loan’s entire lifetime.
Why TIP is Critical
Total Interest Percentage assumes you will honor the terms of the mortgage for the entire time and make regular payments. TIP is important if you are planning on purchasing a home and living it for the rest of your life.
However, TIP is not relevant if you are going to sell your home in less than 30 years.
Several factors can affect the total amount of interest you will pay, including:
- Extra payments toward the principal and paying off the loan earlier
- Refinancing can also lower the interest rate
Lenders will calculate TIP based on current interest rates if you request the mortgage Loan Estimate with an adjustable rate. Note that what you are paying in interest and actual TIP can vary depending on rate changes in the future.
These and more factors make it difficult to determine what is a Good Total Interest Percentage.
Strategies to Get a Lower Interest Rate
Here are the top ways to save money and lower the rates for a mortgage loan. Some people save more as they pay off their debt. You should choose the area you think is the best place for growth. Even small things can help in the best way.
Shop Around to Find the Best Loan Estimate Offer
Loan companies customize your interest rates by assessing your credit history. You’ll never know what your rates will be until you apply. Your initial quote will sometimes be less than a good interest rate. Please make a few loan applications to compare Loan Estimates and choose the most favorable rate.
Look at the Interest Rate
Many borrowers are more concerned with rates than mortgages. APRs pay for borrowings, however, which are sometimes much less important than their interest. An APR examines your debt cost and the interest on your loan for the period you’ll be paying it back.
The APR also has more value than the standard rates. Then they will give you details of the exact cost. APR presumes your loan will have a full life span—unlike most people who do so.
If the loan expires, he or she sells or refinances. Inspect the APR but remember price is not always the final decision.
Negotiate With Lenders
The loan applicant receives one quote each time he submits. Usually, the loans are available as a single standard document—Loan Estimate—making them easily comparable. It does not matter if it is the cheapest price or the cheapest rate.
You can request additional terms at the best of your convenience. Often, an excellent strategy is to play lenders off against each other. It is possible to decrease your loan amount if you show your preferred lender an even better offer.
Pay Attention to Mortgage Loan Documents
When requesting mortgage loan quotes, you will receive multiple documents in one. The total interest percentage is a critical figure if you intend to stay in the house long term. However, TIP is not a factor if you are living in a house for a short time.
If you have questions, talk to the real estate specialists at Homes by Ardor. The experts will help you determine how much TIP is good.