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(Re)setting yourself up for trouble

Bob Moon Feb 15, 2008

(Re)setting yourself up for trouble

Bob Moon Feb 15, 2008


Tess Vigeland: Let’s start with the bad news before we get to the worse news.

Figures out this week show Detroit had the highest foreclosure rate in the nation last year: almost five percent of households. Stockton, California came in second. Vegas was third.

And now for the worst yet to come angle of all this. Turns out almost 1.5 million homeowners took out adjustable-rate mortgages at the peak of the housing boom, especially three and five years ago when mortgage interest rates were at historic lows.

A big chunk of those ARMs, as they’re called, are scheduled to reset to higher rates in March. Marketplace’s Bob Moon reports.

Bob Moon: In suburban Los Angeles, Mimi Vitello has been having some nagging second thoughts about the mortgage she signed for, a couple of years back.

Mimi : I remember hearing dinnertime conversations about these adjustable rate mortgages: “What are you thinking?!,” but, you know, at the time it seemed like a good idea.

At the time it seemed like it was worth the risk to grab a house before the price was out of reach:

Vitello: Because I was not in a position to be able to be comfortable about my mortgage payments. I really didn’t think it through all the way.

Vitello is one of the fortunate homeowners who’ve now thought twice and whose circumstances have allowed them to refinance before their house payments explode.

Before their payments reset, that is, which is a nicer way of saying:

[sound of explosion]

Greg McBride: You cannot let an adjustable rate mortgage blindside you with a big payment increase that could jeopardize your ability to stay in the home.

Personal finance expert Greg McBride at Bankrate.com says if you have no idea if your mortgage is about to reset, ignorance is not bliss. It’s time to dig out your copy of the loan contract:

McBride: There’s often a sheet known as an “adjustable rate rider” that contains very important details — when that rate is scheduled to reset.

Perhaps more importantly, you’ll find info you’ll need to figure out your new payment. It should list a specific floating index — perhaps the one-year Treasury note or other commonly-used rate you can look up online, or in the business section of many newspapers.

McBride: This is something that changes day to day, so it’s something that you can track to get a handle on, where it is and what that means in terms of your payment when your loan resets.

That index, plus an extra margin, or percentage, that’s specified in your contract, determines your new payment. McBride says a calculator at Bankrate.com can help you crunch the numbers and check to see if there’s a limit, or cap, on how much your payment can go up.

Let’s say you’ve determined your new payment will be more than you can handle. At Residential Pacific Mortgage, senior loan officer Dick Lepre says it’s time to start negotiating with the place you send your payment:

Dick Lepre: Look, my rate is five percent now and is going to be going to seven percent under the terms of this agreement. How about if we just agree to set it at 5.75 percent for the next five years?

Lepre says his own lender actually called him recently to offer a more favorable reset rate. He says most mortgage holders would prefer to hang on to your business — assuming, of course, that you’re a customer worth hanging onto.

Whether you’re negotiating a reset or hoping to refinance into a fixed-rate loan, Bankrate’s Greg McBride says lenders will want to know if your financial situation has changed:

McBride: In instances where your credit score has declined, particularly if you are now considered subprime or if your credit score is below the 680 mark, that’s going to present some barriers to refinancing. If you don’t have proof of income, that is a barrier to refinancing. And if you are upside down in the home — you owe more than it’s worth — that is a roadblock to being able to refinance.

On the other hand, McBride points out lenders have more incentive and leeway than ever to work out better terms. And, you might be luckier than borrowers whose house payments have already exploded. Recent interest cuts by the Federal Reserve might lower the index your mortgage is tied to.

McBride: Your monthly payment may only go up 50 bucks a month, if for example you have a $200,000 loan that’s resetting. That’s in contrast to what would have been a payment increase of $370 a month last summer.

But don’t be lulled into a false sense of security. Loan officer Dick Lepre points out these mortgages can keep on resetting from here on out:

Lepre: The strange thing with adjustables is, just at the time that they become tolerable is when you should be getting rid of them. With rates going down, you suddenly find your adjustable is not so painful, but that’s exactly the time when you can be getting a good fixed rate loan.

…and the emphasis there…is on getting things fixed.

I’m Bob Moon for Marketplace Money.

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