WTF is the TIP (Total Interest Percentage)?
You see it staring back out at you on page 3 of the Loan Estimate. Big and glaring. Total Interest Percentage (TIP). And the percentage is huge! Something crazy like 69.45%. And you thought the interest rate was something in the single digits, right?
This is the amount of dollars paid in interest over the life of the loan expressed as a percentage of the original loan amount.
What does it mean? Glad you asked.
I’m using the Loan Estimate on the CFPB’s website for this. It’s here.
The loan amount is $162,000. The interest rate (note rate) is 3.875% (the old days — when rates were different). The monthly principal and interest payments (mortgage only — doesn’t include any taxes & insurance you may want to escrow) are $761.78. So, the monthly payment is calculated based on the loan amount and the interest rate. Makes sense, right?
Going through page 2, you see the closing costs. OK, fine.
Then you turn to page 3, and BAM — you get hit with a Total Interest Percentage of 69.45%. But you thought the interest rate was lower — like on a different planet lower. You’re right, it is.
What’s this 69.45% mean? Let’s find out.
It takes the dollar amount of the interest you will pay, given the note rate, over the 30 years of the mortgage — this is a 30 year fixed rate mortgage — and calculates what percentage of the original loan amount — $162,000 — you will pay in interest dollars.
Let’s see the numbers (I’ve used a mortgage calculator to recreate the loan scenario here).
$112,242.27 (Total Amount of Interest Paid)/$162,000 (Loan Amount) = 69.29%.
That’s not the same number as 69.45% is it? Close, but not the same. How does the Loan Estimate produce 69.45%? Great question. When using an amortization calculator, it often doesn’t consider the prepaid interest. The amount of interest from the day you close until the end of that month.
On the sample Loan Estimate, there is $262 in prepaid interest on page 2 (right hand column under F. Prepaids).
Add the $262 to the $112,242.27. That equals $112,504.27 — the total amount of interest paid on this loan over 30 years in dollars.
$112,504.27 / $162,000 = 69.45%. And there it is.
What’s the point of the Total Interest Percentage?
The CFPB says, “The TIP tells you how much interest you will pay over the life of your mortgage loan, compared to the amount you borrowed. The total interest percentage is calculated by adding up all of the scheduled interest payments, then dividing the total by the loan amount to get a percentage. The calculation assumes that you will make all your payments as scheduled. The calculation also assumes that you will keep the loan for the entire loan term.”
Basically, it helps you to understand the full cost of the home you are buying by telling you how much the mortgage is going to cost over the life of the loan. Of course, this assumes you are keeping this same home and same mortgage for the whole 30 years.
