1. The Perfect Mortgage! Or is it?

Perfect_MortgageThe couple was excited! They’d found a house they loved and even the name of a real estate agent they liked on one of their first drive-throughs of the most beautiful neighborhood in town. Better yet, they’d found a mortgage company that approved them for a whopping loan, $270,000 for 30 years, with no hassle, no closing costs, no "points"— and an interest rate two percentage points below the competition.

Better yet, the mortgage was an option adjustable rate mortgage, which cut the payment, when interest rates went down, but didn’t raise the payment a nickel if the interest rate went up! And they only needed to pay 10 percent down, not 20 percent, like those other companies. The couple grabbed that loan quicker than you could grab a set of free tickets to Tahiti. The payment stretched their budget a bit, but they could handle it.

And were they happy! Until the fifth payment, that is, when the payment unexpectedly jumped $300 per month. Turns out the "lower" interest rate promised by the mortgage company was just a "teaser" rate for the first four months. After four months, the base interest rate jumped higher than the base rate of the other mortgage companies the couple had shopped.

Now the payment really stretched their budget—especially when the couple got their first property tax bill at the end of the year: their property taxes had doubled. No one had warned them property taxes can go up dramatically.

But they struggled with the payment for four years, at least comforted by the thought that their payment hadn’t gone up even higher: interest rates during those four years had jumped from 4 percent to 8 percent, but their payment didn’t go up a dime. At least something was working right!

Then rates dropped back to 4 percent over a six-month period, and the couple watched each month for their payment to decrease. It didn’t. What was wrong? The couple didn’t know their "adjustable" mortgage rate was very different from the adjustable rate mortgage plans at the other lenders: their mortgage company’s plan allowed the company to delay lowering payments until a full six months after interest rates dropped. Very nice for the company, but not so nice for the couple.

Then his company down-sized, along with his position at the company. Very quickly, the mortgage payment became unmanageable. This couple’s only hope was to get a smaller house and a smaller mortgage. That’s when the problems really began:

  • Their old mortgage contained an early termination clause. The couple didn’t even know what that meant, but, with sinking stomachs, they understood the mortgage company’s explanation: "If you pay this mortgage off early, there will be a $12,000 early termination penalty."
  • Even worse, they had a "negative equity" mortgage (also called a "negative amortization" mortgage) with no "cap." The couple didn’t know what that meant, either, but with real terror they understood the mortgage company’s explanation: "Oh, you haven’t been paying down your mortgage at all during the last four years. It’s gone up. It’s gone up by $50,000, even after all your payments. Now, speaking of payments, you’re late. What are you going to do about that?"

Next chapter: 2. The Real World of Mortgages

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