Finance
Under the Truth in Lending Act (TILA), the Annual Percentage Rate (APR) differs from the interest rate because the APR:
AIs always lower than the stated interest rate
BIncludes the interest rate plus certain loan fees and costs expressed as a yearly rate✓ Correct
CIs set by the Federal Reserve and applies uniformly to all loans
DOnly applies to adjustable-rate mortgages
Explanation
The APR is a broader measure of loan cost than the interest rate. It includes the interest rate plus certain fees (origination fees, discount points, mortgage insurance, etc.
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Key Terms to Know
Discount Points
Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Math Concepts
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