Why is the APR Sometimes Lower Than the Mortgage Interest Rate?

When looking at mortgage rates on various types of loans, you will often run across displayed interest rates higher than the annual percentage rate (APR). The APR is defined as the interest rate of the loan, including the various fees and additional costs associated with it.

These fees include closing costs, such as processing fees, insurance fees, origination fees, broker fees, etc. So, it’s understandably slightly confusing when the APR is actually lower than the interest rate. However, this is simply due to the type of loan advertised and how that loan is calculated.

If a mortgage rate is fixed for the entire duration of the loan term, the associated fees of the annual percentage rate push it above the interest rate. Conversely, interest rates on adjustable-rate mortgages (ARMs) often show an APR lower than the interest rate. This is due to how adjustable rate mortgages are computed; they are only fixed for a predetermined period of time, so the remaining segment of the loan amortization period is approximated based on the present mortgage index and margin. This varies from bank to bank/lender to lender. Simply, if the fully-indexed rate is below the initial rate, the APR can be lower than the interest rate.

For example, if an adjustable-rate mortgage has a fixed interest rate of four percent for the initial five years, with a margin of 2.25 percent and an index of a percent, the mortgage payment would adjust lower than four percent after the fixed portion of the loan. This produces an APR lower than the interest rate, when factoring in the anticipated decrease in the overall interest rate. With all the many loan products out there it can often get overwhelming deciding on which loan program to go with. Different banks offer different niche loan products catering to a wide variety of borrowers.

Working with a loan broker is a great way to have your application shopped across many banks and lenders giving you the most options at finding the best loan product for your personal situation. A loan broker has the advantage of dozens of leveraged relationships with many lenders to bring many more options typically at lower rates and lower costs to their borrower clients. Since loan brokers aren’t running huge financial institutions they seldom have the high over-head costs which the BIG BANKS are known to pass on to the borrowers. A broker originating via a wholesale channel can often times be a consumers best choice for a loan.