Calculation of APRs on ARMs - Richard Insley

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Calculation of APRs on ARMs
by Richard Insley, BOL Guru
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Question: I'm looking for a formula for calculating APRs on ARMs. This would include premium and discounted start rates, accounting for the yearly caps.

Answer: The formula for calculating the APR is found in Appendix J of Regulation Z. This formula assumes that all dollar amounts have been precalculated following the various rules for determining the Finance Charge, Prepaid Finance Charge, Amount Financed and the payment schedule. Comment #10 to Section 226.17(c)(1) outlines the method used to determine the payment schedule for discounted and premium ARMs. Yes, this is a very complex subject and errors are common--that's why most lenders do not attempt to develop their own mathematical models and programs.

First published on BankersOnline.com 8/18/03

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