Sudden Overload
When the Mortgage Adjusts Upward, Here's How to Cope
Washington Post Staff Writer
Sunday, March 4, 2007; Page F01
V irginia and Roy Starkes refinanced their home in Richmond four times after buying it 15 years ago.
The fourth was the killer.
Updated Financial Features |
• The Starkeses didn't realize that the monthly payment on their most recent loan would jump to about $1,200 from $1,051 in May -- a budget buster for the low-income couple. Their interest rate will "reset" every six months, potentially maxing out at 15.85 percent.
"We signed what felt like 200 papers, and we just didn't understand all that real estate talk," said Virginia Starkes, 56. "It's partially our fault because we did not know what we were signing, but now we're stuck. We don't know what to do because we just can't afford it."
Millions of Americans, perhaps unwittingly, took a risk when it came to financing their homes. As home prices climbed in recent years, they signed up for nontraditional loans that typically featured tantalizingly low rates that spike in later years. These loans fueled the housing boom in the first half of this decade by putting people in homes they could not otherwise afford.
Now comes the day of reckoning. By some estimates, $1 trillion worth of adjustable-rate mortgages will reset this year, creating "payment shock" for consumers like the Starkeses who didn't see it coming -- and even for those who did but hoped to be in better financial shape before their payments ballooned.
So what next? Refinance? Sell?
Don't even think about acting until you get your numbers straight, said Jack M. Guttentag, professor of finance emeritus at the Wharton School at the University of Pennsylvania who created http:/
For starters, dig out your loan documents and figure out when your adjustable rate adjusts.
Don't look for the new rate in your paperwork because you won't find it.
Instead, look for the name of the published index to which your rate adjusts. (There are about a dozen of them, such as the Cost of Funds Index.) Then identify the margin, which should also be listed in your loan documents. Add the most current value of the index to the margin to get a ballpark estimate of the future rate, Guttentag said.
"By the time the lender sends a notice of the new rate, you should not be surprised if you've been tracking it," Guttentag said. "You want to make your decisions based on what you know, and this is something you can know."
