DIAGNOSIS: ARM
September 10th, 2007 | by rachel |
“Mr. Gage? Dr. Banks is ready for you.”
DR. BANKS: What seems to be the problem today?
M. GAGE: I am worried about losing my house. My house payment is going up - a lot!
DR. BANKS: Tell me about that.
M. GAGE: Well, when I bought my house a couple of years ago, I got a mortgage with a really low monthly payment. Before I applied for the loan, I remember being worried about being accepted. I had some credit problems when I was in college and I am still working on getting rid of that debt.
I was surprised, though, when I applied and got a really good deal. I didn’t have to have any money to put down and my income wasn’t a problem. Basically, I just had to make the monthly payments and they were just a little bit more than what I had been paying in rent.
DR. BANKS: Had you owned a house before that?
M. GAGE: No. I owed so much money that I am not sure I had ever totally owned ANYTHING before that.
DR. BANKS: What made you want to buy a house?
M. GAGE: It just seemed like the right thing to do. The values of houses everywhere were so high and everything I read seemed to indicate that “anyone” could buy a house. Every time I turned on the TV, I saw ads for mortgages with payments that I could make. I thought everyone else was buying a house and it seemed like it would be dumb not to get in on that!
DR. BANKS: Have you been able to make the payments so far?
M. GAGE: Yes. It’s been really easy so far. Sometimes I get a statement that gives me the option to pay what I want. That really helps some months when it’s a little tight. I know that, if I don’t pay enough, the amount that I am short gets added to the overall mortgage. If I do that too much, I’ll end up owing more on the loan than the house is worth.
DR. BANKS: Do you know why the payments are going up?
M. GAGE: When I bought the house, I think I remember that there might have been something about interest rates maybe going up sometime in the future. I thought that meant that I might have to pay more sometime before the loan was paid off but I don’t remember exactly. By the time I had signed all that paperwork, I just remember a bunch of numbers swirling around in my head! Something was said too about selling the house before rates went up.
I have some papers that have a bunch of different interest rates listed. I tried to read some stuff about something called an INDEX, but I got lost in all that. I am not really much of a detail person. I just want to know what it will cost me each month.
DR. BANKS: Have you had other house expenses come up that were not included in the loan you signed?
M. GAGE: Definitely. I have had insurance payments that I have had to pay and then, the taxes were due. It would have been nice to not have to pay that separately, but I can’t really complain. At least I only have to pay those things once a year.
DR. BANKS: Did the mortgage banker spend time explaining the loan you were signing?
M. GAGE: Mostly what I remember about the banker was that he was so encouraging. He just kept telling me that I wasn’t even going to borrow as much as I was qualified for. He told me how affordable the loan was and mentioned, over and over, that I could refinance to a fixed rate later on. It was almost like he was getting something out of the deal too! I never thought I could get a loan to buy something as big as a house but he just kept telling me I could. Eventually, I started acting like I could and I did.
DR. BANKS: Have you looked into the possibility of refinancing to a fixed rate loan?
M. GAGE: A little bit. So far, everyone I have talked to says that I would have to pay a penalty for getting out of my current loan early. By the time I pay the penalty and the fees for the refinancing, I would lose money.
DR. BANKS: Does the term “payment shock” mean anything to you?
M. GAGE: I don’t know what that term really means but I can tell you that I was definitely shocked to see what my payment is going up to! Actually, I have been reading some stuff in the newspaper about the “mortgage meltdown” but I have tried not to lose sleep over it. I still have a little time to figure out what I am going to do.
DR. BANKS: So, how do you feel about this today?
M. GAGE: The closer it gets to the day when my payment will go up, the worse I feel. Sometimes, I am mad at myself for not being as thorough as I should have been. I certainly could have learned more before I signed the dotted line. Other times, I feel like I am trapped. Even though I made a bad financial decision, the system was in place that allowed me to do it. When I was looking for a loan, bankers were tripping all over themselves to help me find one. Now, no one wants to talk to me.
DR. BANKS: Well, I have good news and bad news for you. The good news is that I know what is wrong with you. You have an ARM (adjustable rate mortgage). Sometimes, they are called “variable rate mortgages” and “floating rate mortgages”. The bad news is that you don’t have a lot of options for getting out of it. If you can’t keep up the payments, you’ll probably lose your house.
M. GAGE: Do you have any suggestions for where I might find some more information?
DR. BANKS: Sure. One good source is the Federal Reserve Website. The other place to look is Freddie Mac. After that, I wish you good luck!