# IN LOOKING AT QUOTES ON A 5/1ARM, HOW CAN THE APR BE LOWER THAN THE RATE, IF THE APR INCLUDES FEES?

September 25 2009 - Princeton
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• Contributions:486
Because the "fully indexed" rate on most ARMs is lower than the rate being initially charged.

When the software calculated the rate when the rate adjusts, it uses today's index and margin.  The 1-yr LIBOR is at 1.27%.  With the margin at 2.25, this gives you a fully indexed rate of 3.52%.  APR software will use this for each year adjustment since it has no way of knowing with the index will be in the future.

Therefore, using a rate of 3.52% for the remaining 25 years on a 5/1 ARM's Truth-in-Lending (TIL) will lower the overall APR.
September 27 2009
• Contributions:9642
Ray's answer is correct if it is a conventional loan and no MI. If the LTV is over 80% and any MI is applied, the APR will be higher than the note rate.
September 27 2009
• Contributions:9642
kwihi, the bottom line is APR is flawed and is most evident in calculating an APR on an adjustable rate loan. You should totally ignore the APR, instead compare the note rates and 800 section fees. The caps are only important if you plan on keeping the loan longer than the fixed period, in which case i would suggest getting a longer fixed term like a 7/1 or 10/1 or even paying a little more and securing with a 30 Yr.
September 27 2009
• Contributions:692

1. type of index and it history
2. what is the programs margin
3. what are the caps

APR will be lower since the current index and margin is lower than your start rate; have your loan officer run a amortization table; at the first adjustment (year #5) take the princple amount at that time and add max adjustment, then you will know worse case. with inflation, you can bet that rates will go up.

September 26 2009
• Contributions:454
The difference in the calculation of the APR for an ARM and a Fixed rate is the APR for an ARM is calculated by adding the Margin to the Index, (closing costs presumed to remain unchanged).

Here's a good ARM APR calculator provided by a wondeful MN company:

It is this reason that it is NOT advisable to compare APR against different loan products.

I hope this helps.
September 26 2009
• Contributions:9642
September 25 2009
it means your margin and current index are lower than the note rate.
September 25 2009
• Contributions:37
That must mean that they think the rate will go down in the future.
September 25 2009
• Contributions:283
The APR is a 30-yr figure.  The rate may adjust lower over that time period.
September 25 2009

##### IN LOOKING AT QUOTES ON A 5/1ARM, HOW CAN THE APR BE LOWER THAN THE RATE, IF THE APR INCLUDES FEES?
September 27 2009 | 9 answers
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