# APR vs. Interest Rate

#### stephenandrew

##### Recycles dryer sheets
Hi--
This may be a dumb question, so be gentle. I recently went to the PenFed website to look at mortgage rates. They show a 5 year arm (fixed for 5 years) with an interest rate of 5.5% w/ an APR of 4.507%. I always thought that the APR was supposed to include not only interest, but other fees to give you a true idea of the real interest rate or cost on the loan. If I am right, how can the APR be lower than the interest rate listed? Am I missing something?
Thanks!

Here's some detail
What is an Annual Percentage Rate (APR)?

Key point
"alculating APRs on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs."

So, APR calculations takes into account some assumption of future interest rates in the case of ARMs.So, I guess yours takes into account that the interest rate may fall below 5.5% in the future.

Hi--
This may be a dumb question, so be gentle. I recently went to the PenFed website to look at mortgage rates. They show a 5 year arm (fixed for 5 years) with an interest rate of 5.5% w/ an APR of 4.507%. I always thought that the APR was supposed to include not only interest, but other fees to give you a true idea of the real interest rate or cost on the loan. If I am right, how can the APR be lower than the interest rate listed? Am I missing something?
Thanks!
I've noticed this also and I think, but not sure this occurs when lender pays closing costs, so you are technically borrowing the principal amount plus the closing fees, but since you are making payments on only the principal amount, the apr is lower than the interest rate on the loan. Usually the closing costs are waived after you have kept the loan current for a yr or 2.

At PENFED they generally waive closing costs (i.e., you do not pay them) IF you maintain the loan for at least 2 years (i.e., do not pay it off within 2 years of taking it out).

At PENFED they generally waive closing costs (i.e., you do not pay them) IF you maintain the loan for at least 2 years (i.e., do not pay it off within 2 years of taking it out).

But if you don't pay closing costs, wouldn't the interest rate on the loan = the APR?

APR on ARMs is effectively useless. Its a long cmplicated formula that makes assumtions about what rates will be when the loan resets. Just pay attention to the rate and what the terms are at the reset date. Assuming you want a 5 year ARM, I think the pen fed 5/5 deal is very good.

But you MAY pay the closing cost - but then the APR would be higher. You can tell I have no idea why it is stated like it is (BTSOOM). I like Brewer's explanation.

APR on ARMs is effectively useless. Its a long cmplicated formula that makes assumtions about what rates will be when the loan resets. Just pay attention to the rate and what the terms are at the reset date. Assuming you want a 5 year ARM, I think the pen fed 5/5 deal is very good.

Not me ... I don't care for ARMs (well aside from the 2 attached to my body).
We just did signed a 15 year refi loan @ 4.625% and paid the \$2k closing costs up-front.

But if you don't pay closing costs, wouldn't the interest rate on the loan = the APR?
This is getting hijacked, but yes APR would =interest rate if you don't pay them except I believe they may be REQUIRED to include the closing costs in the APR calculation. When they are waived, they usually have a chargeback provision as mentioned by R Wood.

Not me ... I don't care for ARMs (well aside from the 2 attached to my body).
We just did signed a 15 year refi loan @ 4.625% and paid the \$2k closing costs up-front.

For Feb 2008 that's an almost impossibly low rate/closing costs. Would you mind sending me a PM and letting me know where you got it and what your loan amount and LTV is? I'd like to shop that lender myself! If not that's cool - I understand. Great rate and costs though - that's definitely a PAR rate and with \$2k in fees unless it was a \$50,000 loan you did very well.

As far as PenFed I think the way they present this is a little beneath what I would expect of them to use that type of "allegedly" misleading advertising. I wonder if the FTC is looking at them as closely as they are the "no-brainer, racket and ripoff no-closing costs I'm the only broker who will treat you right the rest are scum" little bald-headed twerp from Texas?

For Feb 2008 that's an almost impossibly low rate/closing costs. Would you mind sending me a PM and letting me know where you got it and what your loan amount and LTV is? I'd like to shop that lender myself! If not that's cool - I understand. Great rate and costs though - that's definitely a PAR rate and with \$2k in fees unless it was a \$50,000 loan you did very well.

As far as PenFed I think the way they present this is a little beneath what I would expect of them to use that type of "allegedly" misleading advertising. I wonder if the FTC is looking at them as closely as they are the "no-brainer, racket and ripoff no-closing costs I'm the only broker who will treat you right the rest are scum" little bald-headed twerp from Texas?

I'm not myself (I mean I am myself, but I'm not myself), but I believe we both got the same deal. It was at PenFed on January 23, 2008 for any conforming 15 year fixed @ LTV 80% or under. The rate was only low that one day; it jumped about 0.5% the next day and has never gotten that low again. My refi cost me \$788.40 on a loan of \$176K.

2Cor521

ETA: As for your second paragraph, I don't know the answer but I suspect that the fact that PenFed actually pays for a lot of the closing costs that are included in the APY calculation means that APY can be lower than APR. On my closing statement I was charged all the closing costs but there were compensating credits for the vast majority of them.

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For Feb 2008 that's an almost impossibly low rate/closing costs. Would you mind sending me a PM and letting me know where you got it and what your loan amount and LTV is? I'd like to shop that lender myself! If not that's cool - I understand. Great rate and costs though - that's definitely a PAR rate and with \$2k in fees unless it was a \$50,000 loan you did very well.

As far as PenFed I think the way they present this is a little beneath what I would expect of them to use that type of "allegedly" misleading advertising. I wonder if the FTC is looking at them as closely as they are the "no-brainer, racket and ripoff no-closing costs I'm the only broker who will treat you right the rest are scum" little bald-headed twerp from Texas?
Like 2ndCor521 mentioned. We locked probably the same day. Although the rates with our lender (a mortgage broker) went up by about 0.5% that same day. Our broker was "Mortgage Funding Solutions", but I think they may only handle the NorthEast area (possibly only NJ, PA, DE, NY).
Our loan was for \$242k on a conforming, full doc loan.

Like 2ndCor521 mentioned. We locked probably the same day. Although the rates with our lender (a mortgage broker) went up by about 0.5% that same day. Our broker was "Mortgage Funding Solutions", but I think they may only handle the NorthEast area (possibly only NJ, PA, DE, NY).
Our loan was for \$242k on a conforming, full doc loan.

2Cor521 mentioned PenFed....did you get the same rate somewhere else?

While a lower APR than interest rate is possible it's highly unlikely. In essence the lender would have to be giving the borrower money that is not a part of the loan to go towards the repayment of the loan. Not many lenders are going to stay in business very long paying the borrower enough outside of the proceeds of the loan to reduce the APR to a point below the interest rate. If they do it too long they'll need to get a bigger truck. On a \$240,000 loan the lender would have to give the borrower about \$67,000 over the life of the loan to reduce the APR from 5.5% to 4.25% - there again as it has already been written trying to use APR's on a 5/5 mortgage is about like trying to predict where a mosquito is going to bite you this 4th of July.

Still, the deal you guys got is a very good mortgage ... at least from where I'm sitting. I have contacted PenFed with the question "How are you doing a 4.25% APR on a 5.5% rate?" The 5.5% is very common and any broker/lender can offer that - it's the APR I find possibly misleading. I have not yet heard back from them.

I should ad that without knowing their index and margin it would be impossible to conclude the weight of truth in their advertising. Still I have never been a fan of index + margin calculation on ARM loans - I do find it deceiving unless the borrower truly maintains the loan for the full amortization period which is highly unlikely. Thus the true APR would be calculated from the start rate and not the index and margin and would be (with a true no-closing costs loan) 5.5% APR on a 5.5% start rate.

2Cor521 mentioned PenFed....did you get the same rate somewhere else?
Jazz,
We did get it somewhere else. Through a broker named "Mortgage Funding Solutions". Our loan was immediately sold off to AmTrust Bank. Who ironically when we called around that same day didn't give us the same rate quoted over the phone.

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