According to a new study by Fed economists many home borrowers are confused about the terms of their adjustable-rate mortgages (ARMs) and underestimate the amount by which their payments could jump.
The study's most astounding findings are the percentages of borrowers who have no clue about the key features of their ARMs such as:
- Maximum rate that can be charged (40% were clueless)
- Maximum rate change at any other time (35% were clueless)
- Index used to determine rates (28% were clueless and many others gave incorrect answers, such as consumer price index or "the going rate")
- Original interest rate (20% were clueless)
- How often rate can change (17% were clueless)
Many, like Stella Adams, executive director of the North Carolina Fair Housing Center, place the ignorance factor squarely on loan officers and mortgage brokers who are either misleading or at the very least not fully informing their borrowing clients.
"What they are told is, "Don't worry about it because you can refinance before the adjustment hits," Ms. Adams says. "Consumers think that if the broker says I can afford this, [then] I can afford this."
There is wide spread difference in understanding of ARM terms between income groups. According to the study 13% of borrowers with $150,000 plus annual income were unaware of the maximum amount their monthly mortgage payment could increase at one time. In contrast 40% of borrowers with annual incomes under $50,000 did not know the cap on those increases.
Sadly, many borrowers using ARMs chose their loans based on the initial monthly
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