April 3, 2007

Your mortgage payment may double in the next two years!

Special to the Times

Do you currently have a typical Santa Clara Valley home loan? If you closed escrow in 2004 or 2005 (like several of your friends and neighbors), you are most likely making monthly house payments on an “Interest Only” adjustable rate mortgage. It started out with a fixed interest rate and fixed interest-only payments for a specific amount of time, after which it becomes an adjustable rate mortgage tied to the One Year Treasury Bill, the One Month LIBOR, or a similar index plus a margin (an additional amount in excess of the index value).

Consequently, you are most likely facing a much larger than expected payment increase when your loan recasts, usually in either month 37 or 61 (for three and five year ARMS). Why? When these mortgages were originated, the indices they were linked to were at historic lows. The One Year Treasury Bill index, for example, was at 2.02 percent in August of 2004; this index is currently at 5.1 percent.

In addition to the dramatic rise in index value, you have most likely ignored the margin attached to that index (if you can even recall what that margin was), since you have not been affected by the margin since the loan’s inception. With the first adjustment, however, the margin as well as the index will become crucial to determining whether or not you can afford to stay in your home when your mortgage recasts (adjusts).

Most borrowers fully (and reasonably) expected to be able to refinance and/or sell their property before they faced the recalculation of their monthly payment at the end of the loan’s fixed, interest only period; given the realities of today’s real estate market, both for refinancing and selling, those possibilities may not be as likely as they once were.

What can you do now? Take a few moments to determine what your new payment will be!

In order to calculate what your new payment will be, you will need to take several steps:

#1: Locate your closing documents, typically a large, legal sized stack of papers.

#2: Locate the documents entitled “note,” “addenda/addendum” and “rider.”

#3: Locate the name of the index and the amount of the margin.

#4: Locate the interest rate cap at the first adjustment.

#5: Locate the current value of the index reflected on the note.

#6: Add the current value of the index to the margin.

#7: Calculate how much time will be left on the mortgage when the first adjustment takes place.

#8: Calculate the fully amortized payment based upon the loan amount at the index plus margin over the remaining term of the loan using an amortizing schedule or calculator.

This payment will only be in place for six months or one year, and the loan will continue to adjust (based upon the terms of the note) over the life of the loan.

Having trouble? If you are unable to calculate your new payment, consult the services of a real estate financing professional for assistance.

Courtesy of the Loan Lagoon, Campbell.