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California Home Loans and the Truth in Lending Act

Karen Lawson
LoanBiz Columnist

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The good news for homeowners and homebuyers is that mortgage lenders now offer a wide array of mortgage loans to suit many needs and circumstances. A potential downside to this is the complex nature of mortgage loan documents, and determining actual loan terms and cost of financing. A federal law called the Truth in Lending Act requires mortgage lenders to state the actual costs of mortgage loans as an annual percentage rate.

Innovative Financing with California Home Loans

With California experiencing some of the highest home prices in the nation, mortgage lenders have addressed affordability by developing home loans that provide low initial monthly payments. These loans can include features such as adjustable rates and interest-only options. These features can be very helpful to smart buyers who need assistance qualifying for home loans. It is essential for homebuyers to thoroughly understand the terms of any mortgage they are considering, and how mortgage terms can impact home equity and the cost of financing.

The truth in lending (TIL) statement shows not only the contractual interest rate appearing on mortgage documents, but also displays additional charges including closing costs and deferred interest as an annual percentage. Many California home loans feature adjustable interest rates, but the Truth in Lending Act only requires disclosure of one interest rate. Understanding that rates can differ from the interest rate stated on the truth in lending statement is important when shopping for home loans.

Adjustable Rate Mortgage (ARM) Loans and Truth in Lending

ARM loans may adjust according to a specific financial index such as the 6 month Treasury index. It's impossible to tell how an index may perform in the future, so the Truth in Lending Act allows mortgage lenders to assume that the index applicable to an ARM loan will not change. The lender will state the indexed rate used at the time the loan is made plus any additional interest charge (margin) effective on a specified date.

The APR shown on the truth in lending statement can be misleading with ARM loans, not just because the rate is unpredictable but because the calculation is performed assuming that the borrower will keep the loan for its entire term. That generally isn't the case; if a borrower gets a loan fixed for 5 years at 5% and plans to keep it only 5 years, then a subsequent adjustment to 7% is irrelevant. Additionally, comparing the APR of an ARM to that of a fixed rate loan proves nothing--the result is completely unusable as there is no apples-to-apples comparison. And finally, because ARM APRs are calculated using a current index they can change daily--so the APR for a loan can change depending on what day the disclosure was calculated.

By limiting APR comparisons to the same kind of loan, and getting the disclosures on the same day, borrowers can get more accurate figures to shop with. Mortgage lenders are dedicated to helping home buyers and home owners find appropriate home loans. They can help their customers understand mortgage terms and truth in lending statements.


About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno

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