Total Interest Percentage (TIP) is the total amount you will pay in interest throughout the life of a loan. It is helpful to take a look at the TIP when comparing mortgage loans across different lenders.
Do you want to know how to look for a new home while considering the Total Interest Percentage? If so, then you are at the right place. You should understand the implications of TIP before making any financial commitments with a mortgage firm. This article will give you a better understanding of the Total Interest Percentage (TIP).
Interest Rate, Annual Percentage Rate (APR), and Total Interest Percentage: What's the Difference?
The annual cost that you spend on borrowing money to buy a property is the interest rate. However, it does not reflect the overall expenses of a mortgage. The APR is the entire cost of capital borrowed over the lifespan of a mortgage plus lender fees and other charges.
TIP, or rather the Total Interest Percentage, does not factor in upfront fees save for prepaid interest if you want to do so. One-year duration is used to determine the annual percentage rate as well as the interest rate.
Your Closing Disclosure and Loan Estimate will also include the TIP on it. To get a percentage, combine all scheduled interest payments and then divide by the loan amount.
For instance, if you took a $400,000 mortgage and paid $200,000 as interest all through the lifespan of a loan, your Total Interest Percentage would be 50% since the aggregate of all interest payments would reflect half of the amount owed.
What Role Does TIP Play?
The TIP estimate is based on the assumption that you will maintain your mortgage for the entire period by adhering to all financial obligations tied to it. Therefore, the TIP is vital if you intend to purchase a property and live there for the rest of your life. Otherwise, if you’re comparing terms offered on mortgages of 25 years but intend to list your property much sooner, the TIP may not be quite as helpful.
Alternative factors could influence the entire charges that you would incur as interest. For example, with additional payments on your principal, you can pay off the loan much faster and save some money on interest. You could also remortgage to secure a better interest rate.
For loan estimates of mortgages with adjustable rates, the TIP is computed using current interest rates. But with future rate fluctuations, the amount you pay as interest, as well as the TIP you get, may differ substantially.
Assess Everything When Comparing Loan Offers
You will be provided with many pieces of information should you inquire about mortgage quotations. Therefore, it is essential to know if you intend to reside in your home for a long time to consider the amount of interest you are likely to incur.
With this information beforehand, you can establish whether TIP is of any value to you. Otherwise, TIP would not be necessary if you intend to stay in a home for a short time. Contact your real estate agent if you have any further queries.