Home Owners Getting Shafted With Nightmare Loans
Here’s a must read article from BusinessWeek on Nightmare Loans.
Jennifer and Eric Hinz of Somerset, Wis., are feeling the squeeze. They refinanced out of a 5.25% fixed-rate, 30-year loan in June, 2005, and into an option ARM with a 1% teaser rate from Indymac Bank. The $1,483 payment for their original mortgage dropped to as low as $747 with the new option ARM. They say they had no idea when they signed up, however, that the low payment adds $600 in deferred interest to their balance every month. Worse, they thought the 1% would last three years, but they’re already paying 7.68%. “What reasonable human being would ever knowingly give up a 5.25% fixed-rate for what we’re getting now?” says Eric, 36, who works in commercial construction. Refinancing is out because they can’t afford the $15,000 or so in fees. “I’m paying more, and the interest is just going up and up and up,” says Jennifer, 34, a stay-at-home mom. “I feel like we got totally screwed.” They say their mortgage broker has stopped returning their phone calls. Indymac declined to comment on the loan’s specifics.
The problem, of course, is that many brokers care more about commissions than customers. They use aggressive sales tactics, harping on the minimum payment on an option ARM and neglecting to mention the future implications. Some even imply verbally that temporary teaser rates of 1% to 2% are permanent, even though the fine print says otherwise. It’s easy to confuse borrowers with option ARM numbers. A recent Federal Reserve study showed that one in four homeowners is mystified by basic adjustable-rate loans. Add multiple payment options into the mix, and the mortgage game can be utterly baffling.
Billy and Carolyn Shaw are among the growing ranks of borrowers who have taken out loans they say they didn’t understand. The retired couple from the Salinas (Calif.) area needed to tap about $50,000 in equity from their $385,000 home to cover mounting expenses. Billy, 66, a retired mechanic, has diabetes. Carolyn, 61, has been caring for her grandchildren, 10-year-old twins, since her daughter’s death in 2000. The Shaws have a fixed income of $3,000 a month that will fall by about $1,000 in November after Billy’s disability benefits run out. Their new loan’s minimum payment of about $1,413 is manageable so far, but the fully amortized amount of about $3,329 is out of the question. In a little over a year, they’ve added some $8,500 to their loan balance and now face a big reset if they continue to pay only the minimum. “We didn’t totally understand what was taking place,” says Carolyn. “You have to pay attention. We didn’t, and we’re really stuck here.” The Shaws’ lender, Golden West, says it routinely calls customers to ask them if they are happy and understand their mortgage loan.
No one will care for your finances like you do. If you don’t understand the loan process and how ARMs work, you owe it to yourself to find out. Ignorance is a sure path to finacial distress.
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September 14th, 2006 at 7:50 am
could.not.agree.more. Hubs and I were mortified when we read that article last week (we get busweek). Can you believe it? I feel so sorry for these people, and know that they likely just don’t understand finances, and got sucked in by a good rate.
But your last sentence says it all, you have got to educate yourself and no one is going to look out for your financial well being except you.
September 14th, 2006 at 6:28 pm
if you have a 5.25% 30 year fixed and refinance, you need to have your head examined!
September 15th, 2006 at 12:50 pm
I agree. However many home owners do not know what interest rate they have. they only know what their monthly payment is. very often someone will call them up and offer to reduce their monthly payment and stick them in a terrible loan where they can make 4-6 points of the borrowers.
thats why some mortgage brokers make over a million bucks a year.