ARM Yourself With Info Before Mortgage Rate Resets
 Borrowers who opted for an adjustable-rate mortgage, or ARM, in return for a lower starting rate often fear that when the mortgage resets, they’ll either have to refinance — possibly at a higher rate — or face a big kick in their pocketbooks.
But even if an adjustment is the last thing you want to see, it shouldn’t catch you off guard. Your lender will remind you in plenty of time to weigh your options, which may be more numerous than you think.
By law, lenders are required to give you at least 25 days — 25 business days — notice of what changes, if any, will take place. And some lenders give you even more time than that.
Exactly how much notice your lender is required to provide should be spelled out in your loan documents. The typical notice is mailed 45 business days before an adjustment, but some loans call for notices to be sent 120 days in advance of changes. Even if you receive “only” a 25-day warning, five weeks is plenty of time in this day of computerized lending to search for something better.
The adjustment notice should contain the date your payment will change, the old and new index rate, the lender’s margin or markup, the old loan rate and the new one, and the old and new principal and interest payment.
Check behind your lender to make sure that the proper index, correct index amount and appropriate index period were used in calculating your adjustment. Also be certain that the lender has the right starting rate and that the margin amount hasn’t changed. All this information can be found in your mortgage.
While you’re at it, do the math yourself to be certain the numbers add up.
Generally, if this is your first adjustment, you can expect your rate and payment to rise. Subsequent changes will follow the market. But the initial one usually — but not always — calls for an increase.
Why? If you’ll recall, your original rate was a discounted one. Now, your lender gets to make up that difference.
Even if rates have declined since you first took out the loan, the drop would have to be greater than the initial discount to prevent your rate and payment from going up.
Refinancing may not be a viable option for people who have seen the value of their homes plummet. Unless you have a big chunk of change in the bank to make up the difference between what you borrowed and what your place is worth now, you are “underwater.” And to persuade your lender to give you another loan, the lender is probably going to have to take a “haircut,” meaning the bank must agree to take the loss rather than you.
Many lenders these days are doing just that for people who want to remain in their homes and can afford to keep them. Anything is better than a foreclosure, for both the borrower and the lender.
But if your original mortgage rate wasn’t too terribly discounted — such as one of those “teaser” rates — it might be wiser to stick with the loan you have.
For one thing, in almost all cases, adjustments are limited to protect borrowers from payment shock as the result of a big jump in mortgage rates.
Nowadays, most adjustables limit the amount your rate can increase at any one time to no more than 2 percentage points. Moreover, increases are normally capped at no more than 6% over the life of the loan. So, if your original rate was 6%, the highest it could go at the first adjustment is 8%. And it could never go any higher than 12%.
Although many people believe the mortgage rate rides the cap — that is, if the cap is 2 percentage points, then the interest rate automatically rises 2 percentage points — that’s not the case.
Another thing ARM borrowers either tend to forget or never understood in the first place is that their rates also can go down.
No one knows what market rates will do in the future, but if they do fall, the rate on your loan could go back down too. Maybe by no more than 2 points a year, but down nonetheless.
By Lew Sichelman
United Feature Syndicate
June 8, 2008
Lew Sichelman can be reached at lsichelman@aol.com.
June 09 2008 01:37 pm | Uncategorized