Had not seen the following scenario before.

The question is whether to ignore the fully indexed (composite) rate in APR calculations if the floor rate is greater than the fully indexed rate.

For example, the index value is 4.55 (15 yr FHLMC PMMS) with a margin of .375. This totals 4.925 which rounded to the nearest 1/8th is 4.875%. The Note rate is 5% and is set for the first, and only, interest rate and payment adjustment in 180 months of the 360 month loan. It's shown as a 15/15/ ARM.

I would normally have payment streams of 180 pyts at the 5% (Note) rate and then 180 pyts at the composite rate of 4.875%. However, the floor rate is the Note rate of 5%. Therefore, it appears as if the only payment stream will be based on the 5% Note rate since future rate adjustments never could go below 5%. I think the creditor will need to disclose that this is a Premium ARM on the ARM Program disclosure but otherwise don't see an issue making this look like a fixed rate loan for APR and FC calculation purposes with a payment amount calculated enclusively on the 5% interest rate.

Any thoughts on what I may be missing?

Thanks.

Why is this a premium ARM. It starts at the index plus margin does it not?

Index plus margin is 4.875%. Note rate and floor is 5.0%. My thought is that any original Note rate (e.g. 5.0%) which is above the composite rate (e.g. 4.875%) is a Premium ARM and conversely, any initial Note that is below the composite rate would be a discount ARM and need to be called so in the ARM Program disclosures.

Oh- OK yes. Sorry, I missed the fact that the note start rate was also going to be at 5%. Yes, that is a premium ARM and since the loan cannot fall below 5%, that is the rate also for the second payment stream of the APR calculation.

Many thanks Mr. Carey