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Rant: Home Buying Offshoot Question (APR Related)

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Rant: Home Buying Offshoot Question (APR Related)

Old 02-20-08, 08:08 PM
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Rant: Home Buying Offshoot Question (APR Related)

Reading the original thread, I've been researching rates to see if it's worth my while to refinance and I am kind of perplexed regarding the way interest rates and APRs are quoted. While I believe (correct me if I'm wrong) the interest rate is the actual rate of the loan and the APR includes the costs associated to close (closing costs, appraisal, application fee, etc.), I understand why the APR would be a higher rate than the interest rate. But how can the APR be less than the interest rate? ING has a quote for a 5/1 ARM 5.25% interest rate and 4.615% APR. I don't get it???
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Old 02-21-08, 12:35 AM
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APR for ARMs is calculated the following way:

Say it;s a 5-yr ARM at 5% and the index is 6-m LIBOR and the margin is 1.5%
(I'm making shit up, whatever)

So, for 5-yrs rate is 5%
Then for 25-yrs rate is 4.5% (2.96% + 1.5% rounded up)

The APR is the avg, so it ends up being lower.
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Old 02-21-08, 07:25 AM
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Under a stable-rate scenario, at the end of the initial rate period, the interest rate used in calculating the APR adjusts to equal the "fully-indexed rate", or FIR. The FIR is the value of the interest rate index at the time the ARM was written, plus a margin that is specified in the note.

Assuming zero loan fees on an ARM, the APR will be below the interest rate if the FIR is below the interest rate, and vice versa.
http://www.mtgprofessor.com/A%20-%20...erest_rate.htm
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Old 02-21-08, 08:05 AM
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you have to be on drugs to consider and ARM now, do you really think rates will stay the same in 5 years?
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Old 02-21-08, 05:18 PM
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The funny thing is all the mortgage companies are saying how great ARMs are because of their super low rates right now and how much money you will save.
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Old 02-21-08, 07:01 PM
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Originally Posted by al_bundy
you have to be on drugs to consider and ARM now, do you really think rates will stay the same in 5 years?

I am only considering it because I only plan on being in the home for less than 7 more years. Might as well get the lower rate, as it is considerably chaper. And I'm not one of those people that cannot afford my mortgage payment, so no worries for me. 5.25% drops my rate 1 full % point.
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Old 02-21-08, 07:06 PM
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Originally Posted by The Bus
APR for ARMs is calculated the following way:

Say it;s a 5-yr ARM at 5% and the index is 6-m LIBOR and the margin is 1.5%
(I'm making shit up, whatever)

So, for 5-yrs rate is 5%
Then for 25-yrs rate is 4.5% (2.96% + 1.5% rounded up)

The APR is the avg, so it ends up being lower.
So, the APR can technically be higher after the fact if rates are much higher during years 6-30?
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Old 02-21-08, 09:08 PM
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Originally Posted by tbone
So, the APR can technically be higher after the fact if rates are much higher during years 6-30?
Yes, or lower. The APR is just an estimate. On an ARM or any type of mortgage.
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