When you compute the APR, all lender fees are added in as paid over
the entire life of the loan. Therefore, on a fixed rate mortgage,
when you add the fees on top of the amount paid on the interest rate,
it always results in a higher APR.
However, on ARMS, the beginning interest rate is only for a certain
period of time. For example, 3 years or 5 years. After that period,
the government (Federal Reserve) mandates that you have to make an
assumption for the rate after that beginning period. The assumption
is that the rate changes to what the fully indexed rate is NOW for the
remainder of the loan.
For example, take a 5/1 ARM that is at a beginning rate of 5%. The
APR calculates the rate at 5% for 60 months and then at the fully
indexed rate for the remaining 300 months of payments. The fully
indexed rate is calculated by adding the index and the margin.
Because short-term rates are currently much lower that longer-term
rates, a fully indexed rate would now be about 4.25%. This is
calculated by adding the 1-year treasury rate of 1.5% to a margin of
2.75%. So unless the fees for the loan were very high, the APR would
be lower because you have 60 months at the 5% rate and 300 months at
4.25%. |
