Hey TRID, why is my client paying 69.45% interest??

October 21, 2015 — Leave a comment

question mark manHere’s something ‘exciting’ (note: sarcasm) that your clients will be seeing going forward.  It’s appropriately called the TIP!

What is TIP?  It’s the Total Interest Percentage – basically it’s the total amount of interest they’ll pay over the life of their loan expressed as a percentage.

Now, that doesn’t seem to threatening, right??  Well, what IF the total interest paid shows 65% on a document they have to sign!!??  That might not go over so well….UNLESS they understand it.  My intent is not for you to be a TRID expert, more so to just simply be aware of some of the changes that will impact your client’s heart-rate during the home buying experience.

We (lenders, real estate professionals, title company reps) have had fun explaining APR over the years (said no one) and now we’ll have fun explaining APR AND TIP, which are included together on the same page of the new Loan Estimate & Closing Disclosure.

Here’s the sample that the CFPB used on their site:

TIP edit

Ouch!  69.45%!  Pretty sure you can expect a phone call from your clients when they see this nifty little number.  Don’t’ fret!  It’s really quite simple to explain.  To calculate TIP you’ll take the amount of interest paid over the life of the loan and divide that into the loan amount.  For the above example the CFPB used a $162,000 loan amount at 3.875% interest rate fixed for 30 years.

Here’s the 4 step calculation (stay with me here J)

  1. $162,000 @ 3.875% for 30 years = $761.78 p/mo
  1. $761.78 X 360 payments (or 30 years) = $274,242 (this is the total amount they’d pay over the life of the loan – you may recall this BIG number on the old Truth-In-Lending form….it’s gone! Small victory…VERY small)
  1. $274,242

   -162,000 (original loan amount)

$112,242 (this is the total interest paid)

  1. $112,242 divided by $162,000 (original loan amount) = 69%

Now, notice the CFPB used a rate of 3875% for their example….What happens when rates trend up to, say, 5%?  At 5% rate the TIP = 93%!!  Good times!!

Again, my goal is simply to make you aware of some of the changes to the mortgage disclosures so that when your clients ask you about it, and they undoubtedly will, you’ll know what they’re referring too.

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