Dear Doctor Mortgage,
I'm a victim of predatory lending and need to know what I've gotten myself into financially.
I paid $779,000 for my home. My FICA score was 630. And I put 15% down and financed the remaining $662,150 by securing a 2/28 hybrid adjustable rate mortgage.
My starting interest rate of 8.85% is indexed to the six-month LIBOR (London Inter-bank Offering Rate) rate, with a 6.576% margin.
The first adjustment is a 3% increase (11.85%) for 6 months. After that, my monthly payments increase by 1.50% and are capped to a maximum interest rate of 14.85%, which is rounded to the closest .125.
For the first two years, my monthly payment is $5,031.24. After that, payments will increase to $6,574.99 for the next six months. And payments for the remaining months adjust to $6,599.32.
At then end of the loan, I have a required balloon payment of $468,502.62. In addition, I have a prepayment penalty at the beginning of the loan.
Could you please explain what I've gotten myself into financially?
Respectfully submitted,
Joe
Dear Joe,
Your loan looks like a typical Sub-Prime program. And, unfortunately, the margin is extremely high.
First, let’s take a quick look at your loan. As you know, the 2/28 ARM is a mortgage that has a fixed rate for the first two years. After that, the interest rate adjusts for the next 28 years, which completes the full 30-year term. With the lowered initial interest rate, the 2/28 is popular with investors who plan to sell a home within a few years.
Investor or not, when securing any loan, make sure you understand how cap limits and margins will impact your payment adjustments. The fully adjusted rate will be the current index plus the margin set when your loan closed. And, as you can see, it is important with any loan to verify any pre-payment penalties before closing.
Without that prepayment penalty, and depending on your credit profile, you might be able to get a 30-year fixed loan at 7.125% with APR 7.236%
Still, even with the prepayment penalty, you have options. If the prepayment penalty is 3-2-1 (3points for the first year, 2 points for the second and 1 point for the last), for instance, I suggest you to wait until two months prior to the second anniversary date of your current loan and refinance into a 30-year-fixed loan. If you do this, you will pay 1% of the prepayment penalty to get 7.125% with PMI 0.52%.
If you stay in your current loan for a third year, your current lender will increase your rate to 3% or 8.85%, which equals more than 4.205 points (3% + 8.85% - 7.125% - 0.52% = 4.205%) added costs for the third year. So refinancing before that second anniversary should save you money in the long run.
