Adjustable Rate Mortgage - How To Avoid Surprises

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Adjustable Rate Mortgage - How To Avoid Surprises

Imagine what it would be like if you could plan for changes to your adjustable rate mortgage.

ARM Questions
Here's Your Chance To Ask
Your Savvy Insider

Hi, my name is Kate Ford. I understand how precious homes are to Americans. I should! For over 20 years, I personally financed thousands of mortgages.

When does your interest rate adjust? Do you have a prepayment penalty? It's easy to find out. I'm going to show you how.

Adjustable Rate Mortgage Help

Start by locating your mortgage documents. Look for the large packet of paperwork you received after signing final loan documents with the title company, attorney, or escrow company.

Tip: Create a secure place to safeguard your mortgage financing documents. Include them in your permanent financial records.

Once you find this paperwork, locate 3 documents:

Promissory Note
Adjustable Rate Mortgage Rider
Prepayment Penalty Rider

Confused? Don't get discouraged. At first glance you might not see any documents with these titles. That's because lenders have various ways of naming them.

Here's how to easily identify these important documents related to your ARM.

Promissory Note

The first document is a Promissory Note. It states your interest rate, the original loan amount and confirms your mortgage is an ARM.

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Kate's Definition: A promissory note is a written contract containing the details by which borrowed money is repaid to a lender.

Adjustable Rate Mortgage Rider

Next, find the Adjustable Rate Mortgage Rider. It specifies exact dates that your interest rate is scheduled to adjust.

For example, does your interest rate adjust once a year or after five years? Can the interest rate increase 1% each year or 5% after 3 years?

Read carefully because some mortgages have interest rates that adjust as often as monthly. Look for the maximum interest rate adjustment throughout the mortgage.

Kate's Definition: An adjustable rate mortgage is a home loan with an interest rate that changes even one time. It's also called an ARM or sometimes a flexible rate mortgage.

Prepayment Penalty Rider

The last document is the Prepayment Penalty Rider. Nearly all subprime mortgages have prepayment penalties. The prepayment penalty causes many complications.

Pay close attention to the document. Read it carefully. Understanding it can save you a lot of money.

Kate's Definition: The Prepayment Penalty Rider defines the first day, month and year that a mortgage can be paid off. Lenders penalize the home owner if the mortgage is paid off before the prepayment penalty ends.

Prepayment Penalty Details

The most common prepayment penalty is equal to about 6 mortgage payments. For example, if you owe $1,000 of mortgage interest each month, a prepayment penalty of approximately $6,000 would be added to your mortgage balance.

You could end up owing more money than you originally borrowed. Even worse, if your mortgage balance becomes greater than your home's appraised value, selling a home or refinancing is very complicated.

Learn To Plan For Changes In Adjustable Rate Mortgage

Homeowners can plan for changes in adjustable rate mortgages.

Understanding your ARM helps you anticipate and avoid surprises. Don't be like an ostrich with its head in the sand. After all, it's your adjustable rate mortgage. No one cares more about the future of your home than you.

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