Finance
Under the Truth-in-Lending Act (TILA), the Annual Percentage Rate (APR) differs from the stated interest rate because the APR:
AIs always lower than the stated interest rate
BIncludes the cost of finance charges and fees in addition to interest✓ Correct
CIs calculated monthly rather than annually
DReflects the prime rate set by the Federal Reserve
Explanation
The APR under TILA includes not just the interest rate but also finance charges and fees (such as points, origination fees, and mortgage insurance), making it a more complete measure of borrowing cost. This allows consumers to compare loan offers more accurately.
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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.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
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.
Math Concepts
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