California Real Estate SalespersonFinancingHard
A lender advertises a 30-year fixed loan with a note rate of 5.5%, but charges the borrower 2 discount points and $1,500 in additional finance charges at closing. Compared to the note rate, the Annual Percentage Rate (APR) disclosed under Truth in Lending will be:
- AImpossible to determine without knowing the borrower's credit score
- BExactly 5.5%, since APR only reflects the stated note rate
- CHigher than 5.5%, because APR incorporates points and finance charges
- DLower than 5.5%, because points reduce the effective rate
Show answer & explanationAnswer & explanation
Correct answer: C. Higher than 5.5%, because APR incorporates points and finance charges
APR reflects the true cost of borrowing by spreading finance charges (including discount points and lender fees) over the loan term, which results in an APR higher than the stated note rate whenever points or fees are charged.
Why the other options are wrong
- A. Credit score does not affect the APR calculation for a specific loan's disclosed terms.
- B. APR is required by TILA to reflect finance charges beyond the base note rate.
- D. Points and fees increase, not decrease, the APR relative to the note rate.
APR vs. Note Rate
The Annual Percentage Rate under TILA incorporates the note rate plus points and certain finance charges, so it is typically higher than the stated note rate.
- APR is a TILA/Regulation Z required disclosure
- Includes discount points, some fees, and prepaid finance charges
- Helps borrowers compare the true cost of different loan offers
Memory trick: APR always tells the truer, higher story.