Q-I’ve heard of problems with overcharges on adjustable rate mortgages. What’s this about?
A-Adjustable rate mortgages (ARMs) are subject to a change in interest rates on the anniversary of each adjustment period, which may be monthly, quarterly, semi-annually or yearly or longer. Setting the new rate is a function of the margin and index.
The new rate is set at the index interest rate plus the margin. Margins are typically 2.5 to 2.875 percent. The increases in interest rates are also limited by the maximum permitted rate per adjustment period (usually 1 to 2 percent) and the maximum lifetime increase (5 to 6 percent).
There is a multitude of indexes. A common index is one-year U.S. Treasury bills. This index is based on the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of one year.
The problem in setting new interest rates arises because of the variety of indexes and margins.
Although lenders do not purposely miscalculate a borrower’s new mortgage payment, errors do occur. Some independent studies have indicated that these mistakes are widespread. Borrowers with ARMs would do well to have a financial adviser or CPA recalculate their mortgage payments to make sure that they are correct.
Q-I don’t seem to be making any progress in paying off my loan. What can I do to more quickly reduce the principal?
Your loan was originally $28,565 at 9 percent interest and is being repaid monthly, over 20 years, at the rate of $257 a month.
In the early years, most of your payment goes for interest. As your loan balance becomes smaller, the interest cost declines and more of the payment is applied to the principal.
To pay off your loan more quickly, add an extra amount to each payment. By sending in an extra $33 a month, for example, your loan can be repaid in 15 years. Increase that to $105 and the loan will be repaid in 10 years. Just the extra $33 a month will save you $15,420 in interest over the life of the loan.
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Have a question about real estate? You can write to George Karvel in care of the Chicago Tribune’s Your Place section, 435 N. Michigan Ave., Chicago, Ill. 60611. Answers will be provided only through the column.
