As a homeowner with an adjustable rate mortgage, you deserve to know how to plan for changes. Hi, my name is Kate Ford. I have answers to the financing questions you might not feel comfortable asking your bank.
I understand how precious homes are to Americans. And I understand mortgages with adjusting rates. I should! For over 20 years, I personally financed thousands of mortgages.
Do you know when your interest rate will begin adjusting? How many times will it adjust? How often?
Do you have a prepayment penalty? What is the highest your rate can go?
It's easy to find out these answers. I'm going to show you how. Let's get started.
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:
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.
The first document is a Promissory Note. It states your interest rate, the original loan amount and confirms your mortgage is an ARM.
Kate's Definition: A promissory note is a written contract containing the details by which borrowed money is repaid to a lender.
Next, find the Mortgage Rider for your ARM. 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.
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.
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.
Homeowners can plan for changes in adjustable rates.
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 mortgage. No one cares more about the future of your home than you.
Read this letter I received from a contributor to this website asking for help because her mortgage rate was about to adjust: Adjustable Rate Mortgage Advice - Is there a loan program out there that will just fix our interest rate?
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