Adjustable Rate Mortgage Questions Answered - Kent Wenzel Quicken Loans

Hi, My name is Kent Wenzel and I'm a President's Club Banker at Quicken Loans. Today I wanted to answer two frequently asked questions we're receiving about the adjustable rate mortgage. The first one pertains to the APR and why many times it's actually less than the note rate.

APR is calculated as follows:

If we were using a 5-year fixed ARM at 4% for this example, you would use 4% for the first five years. For the remaining 25 years, we're going to use what the adjusted rate would be at time of origination (which today is approximately 3%). You would also incorporate the closing costs to yield the APR. In this case, because the rate went down, the APR would be less.

Another common question we receive is when an ARM does adjust is the payment based on the current balance or is it based on the original note balance? Unlike a 30-year fixed, the new payment will be based on your present balance. What we've found is that this is very beneficial for a client wanting to take advantage of an ultra-low rate. Also, if they pre-pay on their mortgage but don't want to chain themselves to that high 15-year payment -- when the ARM adjusts because the balance is lower many times your payment will drop down even if your rate were to go up.

Ask your mortgage banker for a few example calculations. You'll be glad you did. Again, my name is Kent Wenzel here at Quicken Loans -- thank you for speaking with us.

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