Explaining Total Interest Percentage (TIP)

Originators and closers will be faced with a new acronym on the Loan Estimate(LE) and Closing Disclosure (CD). They will need to explain the Total Interest Percentage or TIP to the borrower. The TIP is the total amount of interest the borrower will pay over the loan term as a percentage of the loan amount. The TIP is shown along with the APR, Finance Charge, Amount Financed and Total Payments. The 4 familiar numbers will be calculated in the same way as they have been for years.

The TIP examples shown on the LE and CD at the CFPB website show the total interest, as a percentage, will be approximately 69% of the loan amount. The catch is that CFPB examples use a 3.875% interest rate! If interest rates move to 5.5% the TIP jumps over 100%!

How do you think borrowers will be reacting to this?
The TILA information is no longer on a separate form that is easy to avoid in the application package. Originators will need to explain every number, every time.

Be prepared to know how to calculate the TIP amount. The numbers are not clear on the form when PMI or MIP is included in the Total Payments box. If the borrower actually asks where the TIP comes from, you can do quick math in reverse. Simply take the loan amount and multiply it by the TIP; this converts the total interest percentage into the dollars they will pay over the life of the loan. (i.e. $162,000 loan amount x 69.8% TIP = $113,238 of interest paid over the life of the loan. The interest rate in this example is a fixed 3.875%) For ARM loans this cost will be based on the fully indexed rate and of course the borrower may end up paying much more depending upon actual interest rates.

Perhaps the best tip is to avoid the acronym in the first place and refer to it as the total interest expense over the life of the loan.