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The Truth in Lending Act: For Your Protection

Tim Worstall
LoanBiz Columnist

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The Truth in Lending Act is there to protect you when taking your home loan or mortgage.

The aim of the Truth in Lending Act is to protect you and your home loan or mortgage from things that you are not told about by the company offering you the home loan. It might sound odd that in the modern world such a thing should be needed: most companies are entirely delighted to tell their customers exactly that it is that they're buying. However, there are three things that make mortgages and home loans less subject to the normal market forces and thus in need of regulation by things like the Truth in Lending Act. The first is that mortgages are very long term, 20 or 30 years in duration, there's almost no other contract we sign that lasts so long. The second is infrequency: most of us only sign two or three home loans in a lifetime, so we don't have repeated experiences. The third is that they are also the largest contracts we ever sign, thus needing more care and attention than, say, the warranty on a toaster.

What will I be told under the Truth in Lending Act?

The TIL disclosure expresses the cost of the loan as an annual percentage rate (APR), making it easier to compare loans. For example, is a 6% 5 year hybrid ARM costing one point a  better deal than the same loan at 5.75% and costing 2 points? A TIL disclosure can show which loan is more expensive.

The mortgage or home loan company must reveal to you the details of the loan that you are taking out, through standard disclosures and extra disclosures, or "riders," specific to your loan product. Whether there are balloon payments, what the interest rate is, how it can be changed and how that change is calculated, the length of the loan and so on. In effect the whole truth about the lending that the mortgage company is about to undertake.

About the Author
Tim Worstall has a degree in finance and accountancy and writes extensively on matters economic and financial.

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