Ask homeowners who have lost their homes to foreclosure and a surprisingly large number complain that they were unaware of important mortgage features when they signed on the dotted line. Whether you are buying, refinancing or already own your home, a clear understanding of your mortgage is key to avoiding the foreclosure process. Smart owners should determine the answers to the following questions for every mortgage or home equity line of credit (HELOC) they have.
- Who is your lender and is your mortgage a government loan?
Sometimes the lender you get the loan from continues to be your lender until you refinance. Other times, your lender may “sell” your loan to another lender or loan servicer sometime after you buy your home. To find out who your mortgage holder is at any given time, look at your mortgage statements. They will list the name, address, Web address and contact telephone number for your lender. If you get in a bind where you can’t make a payment on time, give them a call ASAP; many lenders are now offering temporary modifications to help keep responsible homeowners from falling too far behind. Know whether your loan is a governmentally insured loan. If you aren’t sure if your loan is an FHA, Fannie Mae, Freddie Mac or VA loan, this should be evident from your original loan documents. If you start having problems with your loan and your loan is governmentally insured, your lender is required to offer you ways to help you avoid losing your home. Keep a copy of the loan documents on hand. If you can’t find them, call your escrow holder or mortgage or real estate broker, and ask them to get you a copy ASAP. - What type of mortgage do you have?
Is your mortgage a fixed-rate loan or adjustable? If you have a fixed-rate mortgage, is the term 15 or 30 years? If your loan is an adjustable rate mortgage (ARM), you’ll need to know what the term is; do you have 30 years to pay it off, or do you have a balloon payment in 10 years? - Do you have a prepayment penalty?
When does it expire and how is it calculated? Will you incur it if you refinance or only if you sell your home? - If your mortgage is adjustable, what type of adjustable rate mortgage (ARM) is it?
Fully adjustable, hybrid ARM or Option ARM? Fully adjustable loans adjust every single month of the loan. Hybrid ARMs have fixed interest rates and payments for the first years of the loan, after which the rates and payments adjust. - If your mortgage is an Option ARM, how much interest do you defer when you make the minimum payment?
Take the difference of the interest-only payment and the minimum payment listed on your mortgage statement to determine how much interest you are deferring or adding to your mortgage balance every month. - If your mortgage is adjustable, what are the adjustment details?
When will it begin to adjust? How often will it adjust? When your mortgage adjusts, will it become amortized (meaning, you have to start paying the principal in addition to the interest)? What is the basis for your mortgage’s adjustment? ARMs adjust in accordance with a particular financial index listed in your loan documents. Some common indexes for ARMs are Prime and the London Interbank Offered Rate (LIBOR). On any given day, these indexes each have a particular rate. Your mortgage documents will state that your interest rate will adjust based on your specific index plus a specific margin, like 1 percent or 2 percent, that you add to the index at any particular time to determine the “fully indexed” rate. So, if your index is LIBOR, and your margin is 2 percent, then you can calculate what your adjusted mortgage interest rate will be at any given time by looking up LIBOR on a site like Bankrate.com and doing the math. For example, if LIBOR is at 4.5 percent, and your margin is 2 percent, then your adjusted interest rate will be: 4.5 percent + 2 percent = 6.5 percent. Every ARM has at least two adjustment caps, limits on how much your payment and/or rate can go up. ARMs usually have a cap for how much your payment can go up per year and over the life of the entire loan. Smart owners with ARMs should know their adjustment caps. - What is your household’s financial continuity plan for “the three D’s”?
You need to ask about how the mortgage payments will get made in the event of a “natural disaster” in your household. Divorce, disability and death are the three most common threats. Make a plan, including life and disability insurance, to cover your mortgage if any of these disasters strikes.
Steve’s Action Tip: Right this moment, set aside an hour this week to go through your loan documents and find the answers to these questions. If you get stumped, ring up your mortgage broker, real estate agent or escrow officer/attorney for help.
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