"PFC" may be one of several mysterious acronyms appearing on your mortgage documents. Banks and private mortgage lenders are in the business of closing loans for profit, and the charges that appear alongside your interest and principal amount serve that purpose. The "prepaid finance charge" covers a multitude of little extras that cover the costs of borrowing a large amount of money, and brings the all-important net income to the lender's bottom line.
"Prepaid finance charges" is synonymous with "closing costs." PFCs include charges over and above the loan principal and interest -- all the costs that the borrower pays to the lender for the service of providing the loan. Lenders disclose these costs to the borrower on a good-faith estimate, which the federal Truth in Lending Law requires within three days of the loan application. On loans backed by the Department of Housing and Urban Development, the lender itemizes PFCs as "adjusted origination charges."
A PFC may be an appraisal fee or a charge for pulling your credit report. It may be a "point," which is a percentage of the principal amount paid by the borrower to bring the interest rate down. It may be pre-paid interest for the first and partial month of the loan, an administrative charge, a document fee, or the cost of a title search and title insurance, which guarantees the seller has clear legal title to the property. Prepaid real estate taxes, escrow fees and hazard insurance are also common PFC items.
Listed separately on your loan documents will be interest on the principal amount, or the cost of mortgage insurance, taxes and any hazard insurance that you will be paying in monthly installments over the course of the loan. If the lender gives you the option to roll the prepaid finance charges into the loan principal amount, then you can avoid a large payment when you sign at the closing. However, rolling PFCs into your principal affects your monthly payment, as well as your interest rate.
PFCs and APR
The good-faith estimate should reveal the amount you'll be paying, and the annual percentage rate on the loan, if you combine the PFCs with the loan amount. This affects the interest rate you'll be paying, which may be higher than the rate advertised. If you take out a $50,000 loan at a fixed rate of 12 percent, for example, you may be paying for $48,000 in principal and $2,000 in PFCs. The annual percentage rate on the monthly payments would be 12.553 percent, based on the principal amount financed: $48,000.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.