APR Lower than the Note Rate

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Is there ever a scenario where the APR is lower than the note rate?


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Mathematically this should be impossible. The APR or Annual Percentage Rate is a compilation of your interest rate and all nonreoccuring closing costs that are associated with the loan. APR is calculated to provide a total measurement of cost. Since there are virtually always thrid party fees that will be nonreoccurring the APR will most of the time be higher than the given interest rate. If however you do a no cost loan and accept an interest rate that pays enough yield spread to cover all these third party costs your APR would be the same as the note rate, not below it.

The only possible way I know of an APR coming out lower than a note rate is if the note is guaranteed to drop its rate sometime in the future. There was a program on the market (do not know if it is still around) that basically worked like this… you start with a 7% rate fixed for the life of the loan(hypothetical but relatively accurate for this program at time I remember it being offered) and you make payments for one full year without being late, and we will reduce your interest rate to 6.75% fixed for the life of the loan. You go another 12 months without missing a payment we’ll drop your rate to 6.5% permanently. This pattern would continue for a total for four rate adjustments assuming the client was never late. As soon as they made a late payment the rate was locked in for life and that float down was no longer available. If they managed to never have a late payment in four years their interest rate would be 6% fixed for the remainder of the term. This type of situtation in which the interest rate is guaranteed to drop could potentially produce an APR lower than the note rate HOWEVER, we in the real estate industry are suppose to disclose worst case scenario meaning we would anticipate you missing a payment in the first twelve months and disclose “worst case,” and in doing so the APR even on this program descrbed above would be higher than the note rate.

If you are seeing an APR that is below the note rate, I suggest you seek a second opinion from an alternative lender that has all your details and can put together an accurate quote based on your personal situation and credit standing. Something is not right.

Good question… APR is a mystery to most, but a very important number that all should understand.

I hope you find this helpful.

Answered over 5 years ago
Peter Gladkin
1002 2

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