Do You Know Your Mortgage?

Here's something that might surprise you: many Americans are confused about the terms of their adjustable-rate home mortgages and underestimate the amount by which their loan payments could jump, according to a new study by Federal Reserve Board economists.

Given the current interest rate environment and the movement to fixed rate mortgages, not knowing your existing mortgage could work against you. The study by the Federal Reserve found that about 35% of people with adjustable-rate mortgages didn't know how much the rate could increase at one time, and 41% weren't sure of the maximum rate they could face. About 28% didn't know which index of interest rates would be used to determine their adjustments. This is good news for lenders who want to switch unknowledgeable consumers, and get a few more fees in their pockets. It's bad news for consumers who want to save money.

It's true that most Americans still finance their homes with fixed-rate mortgages, which are simpler to understand and shield borrowers from the risks of interest rate increases. However, adjustable-rate mortgages have been popular in recent years, largely because they offered low initial payments. This helped some people buy homes that otherwise might have been out of reach. Now those same people could be in financial trouble if their rate increases by too much.

As always, your best bet is to read all the fine print in your mortgage papers, and get help from a trusted financial advisor regarding any terms or conditions that don't make sense to you. Be sure that any movement from your current mortgage to another one really works in your favor, and doesn't just increase your lender's bottom line.

Michael

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