Total Interest Percentage (TIP) Definition

The Total Interest Percentage (TIP) is a declaration that shows you how much interest you will pay on your home loan over the term of the loan.

The TIP for your loan may be found on page 3 of your Loan Estimate or page 5 of your Closing Disclosure. The TIP is especially beneficial when comparing various Loan Estimates.

The TIP calculates the amount of interest you will pay throughout the term of your home loan in relation to the amount borrowed. To determine the overall interest %, add up all of the planned interest payments and divide the total by the loan amount to obtain a percentage. The estimate implies you will make all of your payments on time. The estimate also implies that you would retain the loan for the whole period of the loan.

For instance, if you borrow $100,000 and the TIP is 50%, you will pay a total of $50,000 in interest over the life of the loan, in addition to repaying the $100,000 borrowed. If your TIP is 100%, you will pay $100,000 in interest over the life of the loan (100 percent of the $100,000 loan amount).

The TIP is computed using current interest rates if your Loan Estimate is for an adjustable-rate mortgage (ARM). The actual amount you pay may be more or lower depending on how interest rates fluctuate in the future.

TIP is not synonymous with interest rate or annual percentage rate (APR). In most cases, the TIP will be far more than the interest rate or the annual percentage rate. This is because the TIP is calculated based on the total interest you would pay throughout the life of the mortgage, while the interest rate and APR are calculated on an annual basis. For example, a $100,000 loan with a 4% fixed rate may have an APR of 4.25 percent and a TIP of 72 percent.

Tip: Except for prepaid interest, the TIP does not involve any upfront expenses. A loan with a lower TIP may have greater costs than another loan with a lower TIP. By comparison, the APR includes any upfront expenses. Consider all charges before deciding on a loan.

We have other posts that relate to mortgages such as What Is The Minimum Credit Score Required To Purchase A Home? that might help you out. Or How To Rent Apartments That Accept Evictions for renters.

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Mambwe Abebe