Mortgage: TODAY’S CHAOS WITH ARMs : Cleveland Real Estate

By:
CJ Harrington
Keller Williams Realty
www.cjharrington.com
cjharrington.crs@gmail.com
440.336.0612

Date:
10-19-08

In recent weeks, online articles have overflowed with messages of distress from borrowers faced with an imminent rate adjustment on their adjustable-rate mortgages (ARMs). Most of them want to refinance, but many of those who had earlier taken 100 percent loans are stuck. With the current softness in the housing market, they now owe more than their homes are worth. Lenders are strongly resistant to refinancing loans with balances exceeding property values.
Furthermore, a great majority of the borrowers don't have a clue as to exactly what is going to happen to their ARM rate. They know it is going to go up but have no idea how much. Many of them assume that it is worse than it actually is, perhaps because this gives them an excuse for not doing anything to prepare.
So, if this describes you, it is time to shake the sand out of your eyes. While you can't know exactly what your ARM rate will be on the adjustment date you can know what your ARM rate would be if the adjustment occurred today. Call this the current projected rate, or CPR. As the adjustment date gets closer, the CPR becomes an increasingly good estimate of the actual rate on the adjustment date. You use the CPR to plan your next move.
In order to calculate the CPR, you need four pieces of information from your note. Piece one is the interest rate index to which your ARM rate is tied. Indexes have names like COFI, Libor, CMT, MTA, CODI, and Prime Rate. When you have identified the one used by your ARM, go to http://www.mortgage-x.com/ and find its most recent value. Piece two is the margin, which is the amount added to the index to determine your rate. This is the critically important number because it varies so widely, from 0.75 percent to 7 percent or more. Because it is not a required disclosure, most ARM borrowers don't know what it is until they are hit with a rate adjustment.
The other two pieces of information you need from the note are the adjustment cap, which limits the size of a rate change, and the lifetime maximum rate. Not all ARMs have adjustment caps, but they all have maximum rates.
Sadly, articles such as this one would not have to be written if the lenders servicing ARMs reported the CPR every month, along with the payment associated with it. They calculate it now, but only for the month preceding a rate adjustment. It would be quite simple to do it every month so that borrowers always knew where they stood and had time to prepare for what they saw coming. So, in today's market I call on you to start relying more on yourself when it comes to making yourself aware of your finances. It is a sad reality that many people are too lazy to do this, but they feel like they need someone to blame when it bites them in the a##. So, I ask you to hold yourself accountable and make sure to ask the right questions.

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