Question: I am planning to buy my first house within next 6 months or so. To help me understand some of the issues with house buying, I have been trying to read the relevent informations from quite a few different sources (just preparing myself before I go and see an real estate agent). In todays newspaper, there is an ad for the Going rates (for $100,000 loan with 20% down) from different companies. I have typed in part of the table below (this is for 30 year adjustable rate & Buy down pgms): Company| Rate | APR | Point| PMT | Max Rt| Adjustment Cap| Marg | Index —————————————————————————– A | 3.375 | 6.388 | 0.5 | $442 | 9.95 | 7.5 % pmt | 2.5 | 11 Dist B | 3.95 | 5.96 | 1 | $474 | 9.95 | 7.5 % pmt | 2.25 | 11 Dist C | 3.375 | 5.742 | 0.5 | $442 | 9.95 | 7.5 % pmt | 2.5 | 3.627 D | 3.375 | 6.1 | 2 | $354 | 9.5 | 7.5 % yr | 2.5 | COF E | 4.0 | 7.138 | 1.375| $477 |10.0 | 2/6 | 2.625| 1 yr tres F | 4.0 | 4.07 | 0.0 | $477 | 9.95 | 7.5 % pmt | 2.85 | 11 Dist My questions are: 1. When comparing 2 loans, like A and C, should the comparision be based on rate or APR ? 2. For loans from A & C, rates, Payment and points are all identical still the APRs are different – Why ? 3. What is the signifiance of the Index in last column ? 4. What do Adjustment Cap and Margin signify ? 5. What the difference between the adjustment cap of 7.5 % on payment or per year. 6. Between E and F which is a better ? Does that change if both had 0 points. 7. What does Buy down Pgms mean ? 8. Finally, I know the APR calculation is quite complicated, but what is the mathematical formula for it. Also in all the above payment calculations, APR does not come into picture (payments are same even if APRs are different) – When and How does APR makes a difference. thanks for your insight
Answer: Let me just answer a few of the questions you have in this response. The loans you were comparing in “a” and “c” were both based on a cost of funds index. Most of these indices are at about 3.68% right now.
If you get a loan under a “cost of funds index” it will be a little different than your stANDARD ARM. You will find that the start rate is much lower, and that it is easier to qualify for larger loan amounts under this program–both plusses. Your payments will not increase by more than 7.5% each year. The downside to this type of loan is twofold. One- the amount of interest you can be charged under this type of loan is UNLIMITED. If your payments t during periods of rising rates, this interest is just added to your loan balance. Thus your debt can actually grow even while you are making payments. In summary, a cost of funds loan can be much cheaper over the short term (less than 4 years) if rates are stable. In periods of rapidly rising rates it can kill you. Two- the interest charged is adjusted on a monthly basis after the teaser period.
The difference in the reported APR on loans a and c could be due to a combination of a slight difference in the cost of funds index used by each lender and the fact that some lenders do not update the current index values as often as they should in their promotional literature.
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