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The APR is calculating lower than the rate. Can that be right?
by Jeremy Bachmann
Question: We are currently offering a 5/1 ARM at 5.50% with caps of 2/6. Margin of 2.75 based on 1 yr t-bill. Currently the T-bill is 2.06 therefore using this as an estimate for future payment changes results in the rate lowering with the 61 st payment. This then results in a lower finance charge throughout the life of the loan and therefore calculates an APR that is lower than the rate. Is this correct? I'm not seeing other banks with similar products disclosing a similar APR. Any information you have would be greatly appreciated.
Answer: Yes, this happens all the time in this interest rate environment. Look at Countrywide's (www.countrywide.com) 5/1 ARM today--at 5.25% and 0.125 points, the APR is 4.975%.
First published on BankersOnline.com 1/16/01
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