July 2007
Avoid Homeowner Hangover
Dear friend:
A lot of homeowners have been caught in a "Mortgage
Interest Rate Trap," buying or refinancing their homes
to substantially lower monthly payments by taking
advantage of what sounds like great deals on mortgage
interest rates, and then getting the shock of their
lives a few years later.
There are many sound mortgage programs that can save
you a lot of money over the life of the loan, but the
key is to know the facts before you commit. To help
provide information, The U.S. Department of Housing and
Urban Development (HUD) has a toll free hotline
available to consumers 24 hours a day, 7 days a week. It
offers counseling for borrowers in need from
independent, non-profit counselors approved by HUD.
The Number to call is 1-888-995-HOPE
Adjustable Rate Mortgages:
are they for you?
Whether you are buying a house or refinancing your
mortgage, this information can help you decide if an
interest-only mortgage payment (I-O mortgage), or an
adjustable rate mortgage (ARM) with the option to make a
minimum payment (a payment option ARM) will save you
money or put you in a hole.
Here are two most common unpleasant surprises you can
avoid:
PAYMENT
SHOCK
Your payments may go up a lot
after the interest-only period expires and your payment
amount is recalculated.
NEGATIVE
AMORTIZATION
Your lowered payments may not
cover all the interest owed. That unpaid interest is
added to your mortgage balance so you wind up owing more
interest on your mortgage than when you started.
Be sure you understand the loan term and the risks
you face, and be realistic about whether you can handle
future payment increases. If you're not comfortable with
these risks, ask about another loan product.
What are the alternatives to I-O
mortgage payments and payment option ARMs?
If you are not sure that an I-O mortgage payment or a
payment option ARM makes sense for you, there are
several other alternatives that you can consider.
- Find out if you qualify for a community housing
program that offers low interest rates or reduced fees
for first time homebuyers, making homeownership more
affordable.
- Consider a fixed rate mortgage or a fully
amortizing ARM. Shop around for terms and features
that fit your needs and your budget.
- Take more time to save for a larger down payment,
reducing the amount that you need to borrow and making
your mortgage more affordable.
- Look for a less expensive home. Once you build up
equity in your home, you could then buy a more
expensive home.
Follow this link to the Federal Reserve's website for
a worksheet to help you decide what kind of mortgage
might be best for you.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm
GLOSSARY OF TERMS
Adjustable Rate Mortgage - A
mortgage that does not have a fixed interest rate. The
rate changes during the life of the loan in line with
movements in an index rate, such as the rate for
Treasury Securities or the Cost of Funds Index.
Amortizing Loan - monthly payments
are large enough to pay the interest and reduce the
principal on your mortgage.
Interest Rate Cap - a limit on the
amount your interest rate can increase.
Periodic Interest Rate Cap - limit
the interest rate increase from one adjustment period to
the next.
Overall Interest Rate Cap - limits
the interest rate increase over the life of the loan. By
law, virtually all ARMs must have an overall cap.
Payment Cap - a limit on how much
the monthly payment may change, either each time the
payment changes or during the life of the mortgage.
Payment caps do not limit the amount of interest the
lender is earning, so they may lead to negative
amortization.
Equity - the difference between the
fair market value of the home and the outstanding
mortgage balance.
Good Faith Estimate - The Real
Estate Settlement Procedures Act (RESPA) requires your
mortgage lender to give you a good faith estimate of all
your closing costs within 3 business days of submitting
your application for a loan, whether you are purchasing
or refinancing a home. The actual expenses at closing
may be somewhat different from the good faith
estimate.
Index - the index is the measure of
interest rate changes that the lender uses to decide how
much the interest rate on an ARM will change over time.
No one can be sure when an index rate will go up or
down. Some index rates tend to be higher than others,
and some change more often. You should ask your lender
how the index for any ARM you are considering has
changed in recent years, and where the index is
reported.
Interest - the price paid for
borrowing money, usually given in percentage at an
annual rate.
Margin - the number of percentage
points the lender adds to the index rate to calculate
the ARM interest rate at each adjustment.
Negative Amortization - Occurs when
the monthly payments do not cover all the interest owed.
The interest that is not paid in the monthly payment is
added to the loan balance. This means that even after
making many payments, you could owe more than you did at
the beginning of the loan.
Prepayment Penalty - Extra fees that
may be due if you pay off the loan early by refinancing
your home. These fees may make it too expensive to get
out of the loan. If your loan includes a prepayment
penalty, be aware of the penalty you would have to pay.
Ask the lender if you can get a loan without a
prepayment penalty and what the loan would cost.
Principal - The amount of money
borrowed or the amount still owed on a loan.
Aloha,
Neil Abercrombie
Member of Congress
