Homeowners Should Read The Fine Print On Their Mortgage Documents

First of two articles on refinancing your home loan.

A retired North Side homeowner living on a fixed income was shocked when he learned his mortgage payment was being increased by $268 a month starting October 1st.

Seven years ago, in October of 2012, he refinanced his home loan with an adjustable-rate mortgage (ARM) at a very affordable 3.625% interest rate. However, in October of 2019, the ARM loan matured, or “popped,” and the lender increased the interest rate to 4.75%, boosting the monthly payment by $268.51, or $3,222.12 per year.

According to terms of the loan agreement, the original seven-year ARM had quietly converted to a one-year adjustable-rate mortgage indexed to the Federal Reserve’s one-year weekly average on U.S. Treasury Securities, currently 1.97%. Then the lender tacked on a “profit margin” of 2.75% to jack the interest rate 1.125% to a hefty 4.75%.

What’s worse, apparently the borrower never read the fine print on “rate limits” of the loan agreement.

“Your rate cannot go higher than 8.625% over the (30-year) life of the loan. The interest rate you are required to pay at the first change date (October of 2019) will not increase by more than 5.0%, or decrease by more than 0.875%. Thereafter, your rate can change each adjustment by no more than 2.0%.”

On the last monthly payment of the old seven-year ARM, the borrower paid $1,319.83 in interest, and was credited with a principal reduction of $1,010.59.

Under terms of the new one-year ARM the monthly interest payment in October of 2019 rose $402.14 to $1,721, and the principal reduction shrank $133.63 to $876.96. The next scheduled payment adjustment will be effective October of 2020.

In a terse letter to the borrower, the lender outlined the following options if he anticipates any problems making the higher monthly mortgage payments:

• Refinance your loan with us or another lender.

• Sell your home and use the proceeds to pay off your current loan.

• Ask us to modify your loan terms.


• Ask for payment forbearance to temporarily give you more time to pay your monthly payment.

So, which option did the homeowner choose? With mortgage rates currently on a downward slide, refinancing seemed like the best choice.

According to a new analysis of the nation’s housing market from the National Association of Home Builders and Wells Fargo, average mortgage rates fell from 4.07% in the second quarter of 2019 to 3.73% in the third quarter, sliding to three-year lows in September.

On November 7th, Freddie Mac reported that benchmark 30-year fixed mortgage rates now sit at 3.69%—more than one full percentage point below where they were at this time last year, when the market rate was 4.94%. In Chicago, rates currently range from 3.575% to 3.75%, reports rateSeeker.com

Earlier this summer, the Mortgage Bankers Association reported that refinancing amounted to 49.8% of all mortgage activity. That’s a three-year high.

Apparently, the full-percentage-point-drop has been very good for home buyers, experts say. The National Association of Home Builders/Wells Fargo Housing Opportunity Index shows that housing affordability climbed in the third quarter to the highest level since 2016.

According to the report, 63.6% of new and existing homes sold between the beginning of July and the end of September were affordable to families earning the U.S. median income of $75,500.

In the second quarter of 2019 of this year, 60.9% of homes sold were affordable to median-income earners. In the first quarter of the year, 62.6% of homes sold were affordable. As the report notes, much of the increase in affordability was driven by the decline in mortgage rates.

NEXT WEEK: How to shop for the best deal when refinancing your home loan.

For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.


“The book is Escaping Condo Jail by Sara Benson and Don DeBat. I would say that anybody thinking about buying a condo, or even anybody serving on a condo board, or anybody who has any connection to a condo, this is must reading—all 600 and something pages. Thanks a lot for a great book!”

 

Steve Sanders, “Your Money Matters” WGN TV, December 22, 2014

By Don DeBat

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