Adjustable-loan shocker hidden in fine print

Why doesn't payment rate match interest rate?
Published on Apr 30, 2007

"I have recently heard advertisements for mortgages with the disclaimer that the 'payment rate is not the interest rate.' How does that work?" The interest rate is the rate used to calculate the amount of interest the borrower owes the lender each month. The payment rate is the rate used to calculate the amount of the payment the borrower is obliged to make each month. On most mortgages, they are one and the same, which is why it may be confusing when they are different. Consider a 30-year mortgage for $100,000 at an interest rate of 6 percent. The interest due from the borrower in the first month is .06 multiplied by 100,000 and divided by 12, which comes out to $500. Using 6 percent as the payment rate, the monthly payment is $599.56. This is calculated from a formula that my editors find too complex to show here, but it is available on my Web site. The formula is derived on the assumption that the payment rate and interest rate are the same. It calculates the "fully amo...