ARM mortgages---did I get screwed or what?

[Monkeyleg]

Back in February of 2004, I decided to do a refinance of our house, so that I could use some equity to work on my website full-time.

After the first consultation, the mortgage broker said I'd get 4.875% on a fifteen year note. I thought that was a very good offer, although I hated the idea of adding to our principal balance, which was at that time less than $50K.

Well, when the time came to sign the papers, the broker told me the only way the underwriters would do a refinance was if I agreed to a 30-year ARM at 5.75%. My back was at the wall at that point, so I didn't see a choice. The reason I didn't get the 4.875%, I was told, was because I'm self-employed. Nevermind that I've been self employed since 1987, or that I've made a lot of money during most of those years.

Today I received a notice that my interest rate will jump to 8.75% next month, and the monthly payment will increase from $536 a month to $715.

I've never done an ARM before, because I was warned of the risks, which are obvious. I was expecting perhaps a 1/2 point rate increase, or even a full point. But three points?

If anyone has any experience in these matters, and can offer any tips, I'd sure appreciate it.

The last few months have been just one hit after another. My wife, who doesn't really shoot and who doesn't even know the combination to the gun safe, wants to know the combination now. She wants to "take somebody out" for all the grief we've been going through.

I'm not giving her the combination to the safe, but I sure know how she feels.

[The Rabbi]

I worked in that business for about 9 years.  Check your note to see what the terms were.  Specifically, what is the index and what is the margin to that index.  ARMs typically get priced as LIBOR+2 or something, meaning the London Interbank Offer Rate plus 2 percentage points.
Jumping 3 points in 1 year sounds a little excessive to me.
Check for prepay penalties.  If there arent any I would jump ship to something fixed or at least less excessive than what you have.  Find yourself a mortgage person who doesnt deal in last-minute surprises.

[K Frame]

You may not have gotten screwed, but you're about to.

8.75 is roughly 2.75 points ABOVE the national average 30 year fixed rate right now.

If you have access to a credit union, see what they can do for you. You'll often find a better deal that way. When I closed on my refinance with Navy Federal a few years ago the closing costs were about 1/3rd what anyone else was charging.

[280plus]

Lotta NFCU patrons around here...

8.75% ?

[TarpleyG]

We did a 3/27 ARM (3 years fixed / 27 years adjustable) for the house we are in now knowing that we would either refinance in 3 years or move.  It's 3 year date is in July and we are planning to move to Raleigh then and close on our house the day that the prepayment penalty does not apply any longer--sooner if I can get the right job and right house.  I'd say bite the bullet and refi now while rates are still somewhat low.

Greg

[...has left the building.]

I think it would be a good idea to refinance ASAP like others have said. I'm guessing that you are on a 2/28, so your prepayment penalty should be up.

[Matthew Carberry]

This was through an independent broker right?  I hate those guys (the shady ones anyway).  What he did was standard predatory lending practice.  You should have been credit qualified within a day or so of you submitting the documentation he requested of you and he should have locked the rate in with the investor at that time if you had the equity showing based on your home's tax value.

You really need to look at your loan paperwork to check on the terms (which he should have gone over with you in detail on what adjustments would happen when).  

LIBOR is at 4.9% or so right now; that's your "index" and it changes daily.  Your "margin", is apparently more than 3%, because that is what you add to the index to get what your new adjusted interest rate will be.  The "margin plus index" is controlled by the rate adjustment cap and maximum adjustment, usually 6-10% above your original note rate, (which are listed in your terms of loan paperwork).

If LIBOR is/was at about 4.9%, your original rate was 5.75% and your new payment is 8.75% that means you have a 3% rate adjustment cap and a margin that is even higher.  It can't go all the way to "index + margin" now, assuming LIBOR stays fairly stable (it has been in the mid-to-high 4's all year IIRC) your next adjustment wouldn't be as painful.

But bottom line, you need to get out of this note and you need to avoid the "best rate" nonsense and go to your bank or credit union or a reputable, established (probably large) brokerage who won't be playing games.

There's no reason a self-employed borrower who claims it on their taxes (you can't cheat uncle sam and then expect people to lend you money) can't get a prime rate (fixed or adjustable) mortgage with no fuss and just a little more paper work.  Make sure they give you a signed good faith estimate and truth in lending statement within 3 days of the application being completed (per federal law).  When they talk about rates and you finally choose a program, make sure they put in writing (and signed) that your rate has been locked with the investor and will not change.

If your income is hard to prove, they may talk about stated income or no income products.  These loan types do have an additional up front fee and require good credit scores but they can be an easy solution if you've been writing off every debt against your business and can't show a profit.  They are not rip-offs.

check out http://www.mtgprofessor.com for about the best collection of mortgage advice and calculators you could want.  Read it beforee you go shopping and then read about what the originator is offering you.  There's no hurry and ANY refi can be backed out of for 3 business days after signing at the title office (right of recission) with no money lost except what you've paid up front (and is documented as non-refundable).  You got caught in the "we're so far along" trap.  Don't do it again.



feel free to email me with any other questions.  I'm not the best there is but I love my job.

[Monkeyleg]

The problem for me and getting loans is that I'm self-employed, and I'm a corporation. Even when I was making tons of money, it was sometimes difficult to get a loan, and I never got the best rates.

Usually, instead of withholding taxes from my paycheck, I'll just loan myself money from the corp. That saves me having to pay FICA and co-FICA.

The downside is that my W2 income is usually very low.

So, with the last refinance, they had to look at a "no income" approach.

The problem right now is that I have a $250 hospital bill that was sent to collections back in September. I've been fighting this all along, because I don't owe it. I met my maximum out of pocket expenses for my health insurance last summer.

The hospital put the wrong federal tax ID number on the claim, and the insurance company computers regarded the claim as out-of-network, which resulted in me owing a $300 out of network deductible.

I now have two letters from the insurance company to the hospital saying that the hospital overcharged me. In another week or so, I'll have a letter from the insurance company to the hospital saying that a hospital employee made a mistake, that my credit record is blemished, and that the hospital should contact the credit bureau to correct the mistake.

Of course, all of these events happen over months, not days, so there's no way of knowing when my credit report will be cleaned up.

I was just rejected for a $9000 car loan, not because of my income, but because of that blemish on my credit report.

Lately it's just been one hit after another. Dammit!

[Declaration Day]

I am also self-employed, and got my first mortgage for a home in Dec. 2004.  I owned my last house, but it was on a land contract.

I went through a mortgage broker because I was certain my bank would not approve me with my employment status and short credit history.  

Fortunately, rates were still very low, and I managed to get  a 6.4% fixed mortgage.  This was much lower than I expected, so I jumped on it.

I'm no expert on mortgages, but unless rates are expected to drop and stay low for a while, I don't understand how it makes sense to agree to a mortgage with a monthly payment that may go up (possibly significantly).  Someone please enlighten me.

[Firethorn]

Personally, I've always thought that ARMs and interest only mortgages to be a very dangerous option.

I didn't hear about ARMs until interest rates had bottomed out and then started on their way up.  I figured that was the reason why Banks pushed them so much.  They saw the writing on the wall.

Interest only mortgage?  Very fragile option.  You loose your job, you have nothing.  Heck, you have to take a pay cut, you're in trouble.  The only way I could see it making sense is if you're in an apprenticeship type position where you expect your income to increase substantially in a relatively short period of time.  Even then, renting for that period would make more sense.

[Brad Johnson]

Question - did you find this lender on the internet?

30-year ARM at 5.75

I'm guessing you went b-paper. 5.75% is only about 3/8ths of a point below what I'm seeing around here on a conventional mortgage. Your self-employment status probably made it the only way an underwriter would even touch you. But the lender should have see that from the get go. Good lenders, with no more than your credit report and last year's tax return, can give you a reliable quote on costs and interest. Shady lenders (b- and c-paper) will promise you the moon before checking anything then break out the vaseline as soon as you sign a commitment.

I'm also guessing that your lender stacked on between three and five percent in fees at closing (the average cost for conventional loans is less than one).

Also what kind of ARM? There are differences. For most ARMs there is a cap on the per-year interest percentage increase along with a cap on the total lifetime increase in interest percentage. It will be stated like this - 5/1, 5/2, 4/1, etc. The first number is the total increase cap, the second is the yearly increase cap.

To answer your question ... Yes, you got screwed. And you should never, ever, leverage your home against anything. Period. With the exception your primary mortgage, there should be no liens agains your primary residence. If you need money take out a loan agains the equity in your car, or get a large-limit credit card that allows you some flexibility in payback. Or get a line of credit at the bank under your business name. But never put your house at risk. There are more far-reaching potential problems than a larger payment.

You will want to go back and carefully read your mortgage agreement. I'm betting that, in addition to the horrendously inflated interest, there is probably a stiff pre-payment penalty. In other words, you may be penalized for paying it off early.

A traditional ARM is great if you have no other way. It allows you a smaller short-term payment until you can get more conventional fixed-rate financing. A b-paper ARM is like pledging your soul to the devil. They have you by the short hairs and there isn't a damn thing you can do about it except keep making your payments. At least with current payments they can't foreclose. Just be sure you make all your payments, and make them on time. Miss a payment and watch what happens. They will start shifting payments (on paper) to show your current payment as the late payment for the previous month. Every month will stack up as another late pay, along with late fees. And you can be darn sure they will report it to the credit bureau. If you want to see your credit score fall right into the shitter then be late on a couple of mortgage payments. The only way to ruin your credit faster is to file bankruptcy or have a vehicle repossesed.

Brad

[Art Eatman]

"Personally, I've always thought that ARMs and interest only mortgages to be a very dangerous option."

Loud agreement.

The interest-only mortgage is fine for a speculator when prices are rising quickly.  Buy, rent for a while; sell at a profit.  Buy to live in "forever", to call it Home Sweet Home?  No way.

What's happened to a lot of people is that they buy more house than they actually can afford.

I guess that if I were going to buy a house, were I still a working stiff, I'd limit myself to whatever amount of house I could afford at 8% or so on the note.  If I get a 6% or 7% note, I'm in tall cotton.

[Brad Johnson]

Gotta give a big 'ol thumbs up there. Interest-only is just a piss-poor way to get into a home. If your finances won't allow you to make a full P&I payment (including taxes and insurance), then you are buying too much house.

Interest-only was dreamed up to sucker people too ignorant to add and too dumb to care. Okay, so your name is on the deed but you don't really own anything. If all you are doing is paying interest then, by definition, you have no ownership in the principal. And you still have all the liability.

When I first got into real estate it was depressing to see the people who really were good with their finances be unable to buy a house because they didn't have money for a down payment. Well, the reason they didn't is becuase they took all their money and used it to keep their bills paid and their obligations met. These were the people that should have been at the TOP of the lender's "I like you" list. Now, good credit scores really will reap you benefits. There are conventional morgage products now that will allow you to get 100% financing at a premium rate, and still allow for the seller to fund most - if not all - of the buyer's closing expenses. All it takes is verification of employment, a clean credit history, and minimum credit scores in the very high 600's to low 700's. Finally, it really does pay to keep your nose clean! Prove that you are financially prudent and you can, quite literally, walk into a new home with no out-of-pocket expense. Chalk one up for the good guys.

Brad

[The Rabbi]

"Personally, I've always thought that ARMs and interest only mortgages to be a very dangerous option."

Loud agreement.

The interest-only mortgage is fine for a speculator when prices are rising quickly.  Buy, rent for a while; sell at a profit.  Buy to live in "forever", to call it Home Sweet Home?  No way.

I would have to disagree.  ARMs and IO mortgages are tools.  Like any tools they can be misused.  Also like any tools in the right hands they can be very useful.  So someone who gets a lot of his income in just a few months will do well with an IO mortgage, making his interest payments for 9 months and catching up the principle in the other three.  ARMS also have a place.  I have had mostly arms over the years and never regretted it.
Do people not understand what they are doing and get into trouble with them?  Sure.  People also shoot themselves with guns by accident.  Don't blame the tool.

[Firethorn]

Do people not understand what they are doing and get into trouble with them?  Sure.  People also shoot themselves with guns by accident.  Don't blame the tool.

I think that most of us here would agree that guns can be a very dangerous tool that can be misused.  I just wish they'd teach common sense personal accounting and financial planning in school.  Right along with the gun safety course.  I never said they couldn't work, what I said was that they were dangerous(to a person's finances), and put people in a fragile situation, as in any disruption of income and they could loose their home and credit and have nothing to show afterwards.

As for ARMs and interest only mortgages:
Arms:
You loose some of your planning ability.  1% of 100k financed=  $1,000 or $83 extra a month.  How many people are 'only' financing $100k today?  It's more like 300k, Adding up to $250 extra a month.  My car payment is only $300.

I feel that it's like playing the market, and while I was hearing about them interest rates were rising.  Now I think they're leveling off, so it might make more sense.  Still feels like I'd be playing the market.

IO Mortgage:

The only way I could see it making sense is if you're in an apprenticeship type position where you expect your income to increase substantially in a relatively short period of time.

Though your explanation also works.  But how many people are in that sort of situation, and can afford a house?  Most teachers still get paid over the summer.

[The Rabbi]

As for ARMs and interest only mortgages:
Arms:
You loose some of your planning ability.  1% of 100k financed=  $1,000 or $83 extra a month.  How many people are 'only' financing $100k today?  It's more like 300k, Adding up to $250 extra a month.  My car payment is only $300.

I feel that it's like playing the market, and while I was hearing about them interest rates were rising.  Now I think they're leveling off, so it might make more sense.  Still feels like I'd be playing the market.

I had an ARM when rates were rising and held it when rates were falling.  Yeah, it was kind of painful paying 8% for a while.  But I made it up and more when rates fell.  Everyone else was paying $2-3k to refinance and I didnt do a thing.  I think studies are that over the long haul ARMS save money.
The issue you bring up comes about when people stretch to make the mortgage.  That is mistake number 1.  My advice always is: qualify on a 15 year but take a 30 year.
My mortgage payment is $311 a month.  My car payment is $0.  For all 3 vehicles.

IO Mortgage:

The only way I could see it making sense is if you're in an apprenticeship type position where you expect your income to increase substantially in a relatively short period of time.

Though your explanation also works.  But how many people are in that sort of situation, and can afford a house?  Most teachers still get paid over the summer.

Airline pilots are prime candidates for IO mortgages, making a ton of overtime from Thanksgiving to January.  A lot of retail businesses the same.  CPAs and tax preparers work feverishly from Jan to April.  Real Estate agents close most of their sales from February to June.  Some executives get a lot of their salary in end of year bonuses or stock options.  I could go on here.  There are lots of good candidates for IO mortgages.  There are also people who have no business with one.

[BryanP]

The only kind of mortgage to get is a 15-year fixed rate.  The payment on that mortgage should be absolutely no more than 25% of your monthly take-home pay.  If you have to go 30 or ARM, and/or if the payment is more than that then you're buying too much house for your income level.

Why?  Because bad things happen.  When they do you'll be glad that you can back down your lifestyle and still make your house payment.

Second mortgages, refinancing, etc.. are a sucker's bet.

[Firethorn]

The only kind of mortgage to get is a 15-year fixed rate.  The payment on that mortgage should be absolutely no more than 25% of your monthly take-home pay.  If you have to go 30 or ARM, and/or if the payment is more than that then you're buying too much house for your income level.

Why?  Because bad things happen.  When they do you'll be glad that you can back down your lifestyle and still make your house payment.

Second mortgages, refinancing, etc.. are a sucker's bet.

Sigh...  If only more people were willing to take your advice the housing market wouldn't be as inflated as it is now, and I'd be able to afford a good place.

The issue you bring up comes about when people stretch to make the mortgage.  That is mistake number 1.  My advice always is: qualify on a 15 year but take a 30 year.
My mortgage payment is $311 a month.  My car payment is $0.  For all 3 vehicles

I'll agree with you about stretching.  If you don't stretch, you'll find that you aren't suddenly broke and in debt when something bad happens.  And statistically speaking, over a 30 year period something bad will happen.

Well, I sold my car when I went overseas, then bought a new car when I PCS'd back to the states, got a 0% loan for it.  Another year and it'll be paid off, then I'll start depositing the $300 into a mutual fund or something for my next new one, as well as maintenance expenses.

I just haven't seen a house I'm willing to pay the price for yet.  The fact that Uncle Sam may decide to move me at any time doesn't help.

[Matthew Carberry]

I disagree, assuming you can both qualify for AND REALISTICALLY AFFORD the home, get the 30 and pay the principal as a 15.  Sure you are paying a bit more in interest but the loan is still gone in 15 and you can write off the higher interest on your taxes.

And, if something goes wrong or your life changes (new baby, kid goes to a higher cost school than planned, car takes a dumper on you) you can drop back down to the several hundred dollar a month lower "real" payment you actually owe and use that monthly money to cover the new expenditure til you rebudget or fix the problem.

Same short pay-off with greater flexibility.

If you are in a 15 and you need money "right now" you are looking at taking on debt to cover the emergency or unplanned event while still being liable for the higher house payment you absolutely cannot afford not to pay.

As for I/O's and ARM's?  They are definitely tools.  There is absolutely nothing wrong with them as products, the fault is with lenders who use them to mislead people into buying more home than they can really afford and with the majority of people in this country for whom basic math is a second frikkin' language.

As an example, we get young guys coming up here on 3 year military tours who are going to move away for at least 3 more at the end and have no interest in owning a rental home.  They can get into a 3 year VA assumable arm at 5.75% and get their families off base and into a home, then sell the property (our values are climbing and don't look to stop) when they leave and save money on the interest rate while they are here.

Some of these guys got the 5-year ARM when rates were down in the low 5's a couple years ago.  Right now a troop can assume (cheaper than taking out a new loan themselves) that bad boy 3 years into the 5 fixed at 5.5%, pay one year adjusted at 6.5% (which is right about prime for conventional now) and sell it themselves.  That saves money for 2 people.

I/O's are a bit more specialized, you are in effect renting your home and only taking out the equity created by appreciation (which can be huge) at sale.  But you do get to write it off.  For folks who aren't using the home as an investment there can be very real advantages, but your average first time homebuyer or joe on the street is not that person.

It's all about taking care of your members (I work for a credit union) and educating them.  

Brad, as an aside, no payoff penalties allowed by law in AK.  Even most of the large reputable internet lenders (who aren't bound by it) comply.  Makes it nice.

[Monkeyleg]

We didn't buy more house than we can afford. We got this place for $85,000 back in 1992. It's worth at least double that now.

The mistake I made was not researching ARM's. As I mentioned, though, at that time we were told we were going to get one thing and then were presented with another. And I'd just turned down a job I didn't want to take, preferring instead to pursue the website.

I'll be meeting with a mortgage broker on Wednesday to see what he has to offer.

I'm just ticked that I let myself get screwed back when rates were at their lowest.

[Brad Johnson]

It might be better, and more cost effective, to just bite the bullet for a couple of months until you get the income from the web site flowing. Then you can refi under conventional terms and save yourself the grief.

Brad

[Monkeyleg]

It's going to take a lot longer than a couple of months for income from the site to show up as reportable W2 income. Aside from the shops paying to renew, I have advertisers on the site, although I need to convince my major advertiser to change strategies.

I still have a few days a month working as a freelance photographer for a studio here in town.

And I just picked up another freelance job doing search engine optimization for an internet hosting company.

But none of that will show on the most recent tax returns.

As with many things in life, I had to learn through the school of Hard Knocks.

What I don't understand are underwriters. We've had our own homes since 1983, as well as other debts. Never missed a payment, and always paid in full.

In 1992, I was qualified for as much as $400,000 on a mortgage. There was no way I was going to extend myself like that.

Now, the bean-counters look at me and have second thoughts.

Sorry, folks, but I just don't get it. If I can pay all of my bills on time and in full, what makes them think that I won't be able to if they give me a better rate and a lower payment?

[Bogie]

Right now, I'm wishing I'd gotten an ARM... Something like a 3/15, that sorta thing.
 
Those are very good if it looks like you're going to be moving in a few years. And it looks like I may be moving... sigh...
 
I got a 30 year fixed at 6.25. I suppose I could maybe refi a little lower, but hey...

My advice: Don't talk to a mortgage broker. Talk to the bank that you normally use with your business. Heck, are you married? Does your wife work?  If her employer has a credit union, start looking in that direction.
 
I generally pay a little over on mine, but the nice mortgage folks (and I used a bank...) missed a local tax, so my payments jumped a bit...

[Brad Johnson]

Don't talk to a mortgage broker. Talk to the bank that you normally use with your business. Heck, are you married? Does your wife work?  If her employer has a credit union, start looking in that direction.

First, the bad news - your bank IS a mortgage broker. Very few banks, and then usually only very large nation-wide banks, hold their mortgages in-house. Most bank mortgage depts are, for all intents and purposes, a seperate entity from the bank that only shares a corporate parent. Your previous relationship with them is, unfortunately, of little value in getting some type of preferred treatement. Same goes for credit unions, although some do offer very slight discounts (on the order of an eighth of pecent, usually). Keep in mind that even a full quarter point change in your rate equates to only about $7 per $100K financed.

Now, the good news - six and a quarter on a 30-yr fixed is about the going rate (locally it was 6.375% as of yesterday). If you didn't get completely shafted with outrageous administrative fees then you did fine. We are lucky here in Lubbock. The going rate for a loan here is $500-$800 in actual fees before you start adding on the assorted other outside closing costs like surveys, appraisals, etc. I see loan costs in other cities anywhere from $1500 to over $3000 for the same loan.

I wouldn't refi unless you can save at least 2% on your current rate. With rates slowly edging up, I don't see that happening any time soon.

Brad

[Matthew Carberry]

Monkeyleg,

If you have upfront cash or enough equity to wrap it in and credit scores in the 680+ range you can get a fixed rate refi, stated income/stated asset or no income/no asset.  Self-employed folks use them all the time.  

It will definitely have upfront loan level price adjustments (fees dude, fees) and they might want to bump the rate a few eighths so you'd be looking at 6.5-7-ish%.

Might be worth at least getting a good faith estimate from somebody reputable.