The Smooth Loan Process #2010-10

Simple Mistake or Rip-off?
I have found a disturbing trend with the payment calculations for those of you that are in Adjustable Rate Mortgages that I want to make you all aware of. First, let's go back in time a bit.

We all remember 2005. Star Wars Episode III was the top movie. Battlestar Galactica was the top tv show (yes, I'm a sci-fi geek too). And everybody refinanced or purchased with an adjustable rate mortgage. Well, not everybody but nearly 50% of the home loans closed in 2005 were adjustable rates. Most of those ARM's were 5 year arms that had a fixed rate for the first five years, then the rate can adjust once per year.

Now its 2010 and all of these 5 year ARM's will be adjusting soon. For most of us with the adjustable, we did not expect to still be in the same house we purchased in 2005. Or we expected that there would be enough equity to refinance to a fixed rate. The burst of the housing bubble took care of that plan. We can't refinance because there's no equity. We can't sell because there's no equity. And we can't afford a higher payment if the interest rate goes up. So what do we do now?

Nothing! The good news in all of this is that for most ARM's, you will see your interest rate decrease. The new interest rate on your loan is determined by adding the index on your loan to the margin. Your loan most likely (but not all) uses the London Inter-Bank Offer Rate (LIBOR) as its index. At the time I am writing this, the LIBOR is about 0.875%. Your margin was determined by your lender when you took the loan. It is basically the profit that your mortgage company will earn on your loan. Most margins range from 2.0% to 3.0%. The index changes daily. The margin is always fixed.

So let's say your adjustable has a margin of 2.25% and the current index is 0.875%. Your new rate would be 3.125%. Your rate probably started at about 5.125% in 2005 so you've just seen your rate decrease by 2%. Very good, for now. We'll have to worry about this again next year because the rate will adjust annually from this point forward.

You will receive a letter from your current mortgage company that will state what your current rate and new rate will be when the rate change goes into affect. Read this letter very carefully! We have found that on a few occasions the rate was not adjusted correctly. If you dont catch this, you could be paying more for your mortgage than you actually owe.

One of our clients received such a letter the other day. It said that his current rate is 5.125%. The letter also says that the Index is .905% and the margin is 2.25% so the new rate would be 5.125%. Wait a minute... I'm no math wizard (actually, I am) but .905 + 2.25 equals 3.155. Not 5.125. When the client called his mortgage servicer, their response was "oh, I guess we made a mistake". Needless to say, our client is suspicious. How many of us did not catch this mistake?

The Smooth Loan Process lesson for today: If your adjustable rate loan has changed recently, the rate should have gone down and double check the notice that your rate has changed against your closing documents to make sure it's been done correctly.

Bonus Lesson: Today, the most popular show on TV is House (according to the internet) and the top movie is Avatar.

Harold Perkins
Galaxy Lending Group LLC
602-595-1233
Harold@HaroldPerkins.com