It’s all over the news. Some of the nations’ biggest mortgage lenders are in financial trouble, and if you are like many people you’re concerned that trouble is about to come knocking on your front door! A recent survey* found that over a third of all homeowners have no idea what type of mortgage they have, and that many are worried about being able to make their payments within the next year. So how do you make sure you are on solid ground?
First, don’t beat yourself up if you are confused. There is a lot of paperwork and legalese that consumers deal with when they buy or refinance a home. Many people simply don’t understand the full scope of the legal terms and conditions of their loan at the time they commit, or they forget that the mortgage or equity line they sign up for can change over time. Very often people don’t think about the loans on their home until their monthly payment goes up or they hear stories in the news that scare them.
Before you get too nervous about the subprime market or the instability of the mortgage industry, you need to identify exactly what type of a loan you entered into a contract for, whether the interest rate or payments on your loan can increase, and what the lender can or can’t do legally! There are different types of mortgages out there. Generally, if you have a Fixed Rate Mortgage, the lender can only change your monthly payment if your property taxes or insurance rates change. If you have a straight forward Adjustable Rate Mortgages, often referred to as an ARM, you entered into a contract with an adjustable rate from the start, which means your interest rate and payments can change over time. There are also Hybrid Adjustable Rate Mortgages. If you signed on for that type of mortgage then your loan has fixed payments for a certain number of years before it converts to an adjustable loan. People can really get caught off-guard with this type of mortgage. They often start out with a good rate, but the long term scenario can be financially disastrous.
Hybrid mortgages are often identified by two numbers with a slash between them. For example: 2/28. With this thirty year loan, the number “2” refers to the 2 years the loan has a fixed rate, and the number “28” refers to the 28 years the loan has an adjustable rate. There are also hybrid ARM mortgages where the second number refers to the how often the rate changes. In other words, a 3/1 mortgage usually means you have a fixed rate for three years and then the rate readjusts every year after for the life of the loan.
Whether you need to worry or not really comes down to how often your payment can increase and how high your rate can go. That isn’t always so easy to ascertain, however. For example, once the introductory interest rate expires on a more complicated and risky adjustable mortgage, a borrower’s payment soars and in some cases doubles! Many experts consider Teaser ARM Mortgages, Subprime ARM Mortgages, and Option Arm Mortgages to be some of the most treacherous. But the reality is, no matter what type of mortgage you have – if your payment is going to go up and you can’t afford it, you have a serious problem!
People are often enticed by very low introductory interest rates figuring they can refinance later, sometimes people’s credit may not have been so good or they couldn’t put much money down, or sometimes people just didn’t understood what they were getting into! Unfortunately, this is what happened to a lot of consumers within the past few years. They didn’t realize how their mortgages could change over time. To determine whether your payments can go up, pull out the legal documents from your house closing or refinancing. Particularly, you want to look at the Note and the Truth in Lending Statement. These documents should spell out things like what type of mortgage you have, what the annual or lifetime caps may be, what the margin on the loan is, if the interest rate can in fact change what index that change will be based on, how much you can expect to pay in overall finance charges if you have a fixed rate, whether you are paying PMI (private mortgage insurance), and whether you would have to pay any penalties if you paid the loan off early (i.e. refinanced).
Educate yourself on the basics of your loan and what the terms generally mean. There are some great online references available. For example, The Federal Trade Commission has a good website that is easy to navigate. There are also many consumer agencies and mortgage companies that have online glossaries of words and phrased commonly used. Once you have done your homework, sit down with a qualified and reliable mortgage broker or real estate attorney to discuss what you have and what your options are.
If you are already having trouble paying your mortgage because of rising rates or financial difficulties, or you foresee there could be a problem in the near future, don’t stick your head in the sand and hope it will all get better on its own! That is one sure way to risk loosing your equity, your credit and possibly ending up in foreclosure. Analyze your situation carefully. If you are facing a short-term money crunch, talk to your loan server and try to work out a payment plan. Be prepared before you call – have all your facts and figures ready. If you are facing a long-term situation like soaring payments, look into refinancing while your credit is still good! If ultimately you find yourself in a situation where your house will be sold but you won’t get as much from the sale as you owe on the property, consult with an attorney to make sure you do whatever you can to protect your credit and ability to finance a house into the future!
* Conducted by GfK Roper Public Affairs & Media and cited in a recent article by Bankrate.com 2007