Adjustable Rate Mortgages or ARMs are back in the news again. This time the attention is not about whether you should have an ARM or not, but about how your adjusted interest rates are calculated if you already have one.
ARMs are pretty complicated animals, and the computer systems that handle the servicing of them have to be set up just "so" to be accurate.
According to an article in the November issue of Changing Times magazine, John Giddes, a consultant with the Federal Savings and Loan Insurance Corp. has discovered that this is not always the case.
The upshot of Geddes research is that if you have an ARM you should be checking on your rate whenever there is an adjustment made. You can pay a fee (typically under $50) to have this done for you, or you can do it yourself. The time, or money, is well spent, since some borrowers have been overcharged as much as 5 percent per year.
This doesn't often happen in Western New York, according to H. Randall Chestnut, senior vice president at Goldome Realty Credit Corp., partly because this traditionally hasn't been a big market for ARMs when viewed as a percentage of all mortgages originated, and partly because the banks here that service mortgage portfolios are conscientious. However, Chestnut said, mistakes can happen.
"I think that people should double check their new rates, just as they should watch anything else in their personal business," he said.
Checking out your new interest rate is not a simple matter, but here's how to go about it:
First look up your original contract and make a note of the amount; the adjustment period; the index type; how the index date is chosen; the initial interest rate; the lender's margin (what he adds on for his profit); any annual or lifetime caps or floors and the loan's term.
Check out the way the date of the index is determined. This can be confusing. It may be 45 days before the change date, for instance; or it may be 45 days before the change date. If you can't figure it out, talk to your lender.
Once you have established that date, look up the actual figures for the index value. These indexes (ARMs are often tied to Treasure Bond indexes) are typically published in papers such as the Wall Street Journal, USA Today, or the Buffalo News.
If you can't find your index rate on the day used to calculate your adjustment, call the Federal National Mortgage Association's (Fannie Mae) rate hot line (1-800-725-7020) for information on Treasuries; and the 11th District Cost of Funds or The Office of Thrift Supervision (1-800-906-6988) for information on the National Average Contract Interest Rate, the National Monthly Median Cost of Funds and the National Average Cost of Funds.
To find you new rate, use the new index value, and add to it any margin that is stated in your contract. If your contract calls for rounding up, do so, if not -- don't.
For example: Say you have a $70,000 30-year loan with an initial rate of 9 percent and a margin of 2.5 percent. It is also rounded up to the nearest .125 points. There's a two-point annual cap and a five-point lifetime cap, and it's based on the one-year Treasury index.
The rate change is based on the rate 45 days prior to the change date, so you've looked up the rate on that day, and found that the index was 8.09 percent. Now add the margin of 2.5 points to get a rate of 10.59 percent, and round off to 10.625 percent. Since the new figure is within the two-point cap on your original 9 percent rate, it becomes your new rate.
Check a mortgage payment table, or use a financial calculator to determine your new mortgage payment. Begin with the balance you still owe (available from your mortgage holder, or calculated from the table), which is $69,522 in our example.
Check the chart for the payment per thousand for your new percentage rate, ours is 10.625 at a monthly payment factor of 9.2862 (from the loan repayment table). Multiply the factor times the amount left to pay on your mortgage (9.2862 by 69 times 522 for a new payment of $645.60) to come up with your new payment.
If there are discrepancies between your calculations and what your lender is now charging you, talk to the lender first. For problems that can't be resolved, you can contact the Office of Thrift Supervision (if you deal with a Savings and Loan), Consumer Affairs Division, 100 G. St., N.W. Washington, D.C. 20552, 202-906-6237; the Office of the Comptroller of the Currency, Compliance Management (national banks), 490 L'Enfant Plaza, S.W., Washington, D.C. 20219, 202-452-3946; or your regional FDIC office for state member banks.
If all this is just too much for you, Loantech (P.O. Box 3635, Gaithersburg, Md., 20885, 1-800-888-6781) or Loan Chek Ltd. (7770 Regents Rd., #113-301, San Diego, CA, 92122, 619-464-8874) will do it for you -- for a fee.
The good news is, if the bank has erred in your favor, it cannot recoup undercharges.
Jeffrey Freedman is a Buffalo attorney who handles real estate, bankruptcy filings, social security disability and personal injury cases.