In part one of this story about Michael and Pam investigating a refinance with Woo Who, we uncovered how the bank Loan Officer was not willing to provide a copy of the Federal Truth in Lending to Michael and Pam. It was not until after Michael insisted that it was his right to receive this document, that it appeared disclosing a prepayment penalty that he was not informed of.
The story gets better. As I mentioned, Michael and Pam's existing adjustable rate mortgage is scheduled to adjust this June. I reviewed the Note with Michael showing him that the index his mortgage rate is tied to is the Monthly Treasury Average (MTA). The Monthly Treasury Average is just that: a 12 month average of the monthly average yields of the US Treasury securities. The 12 month average is determined by adding together the Monthly Yields for the most recently available twelve months and dividing by 12. As it is based on a 12 month average, the rate does not move drastically. This could act as a benefit when rates are moving upwards and is less beneficially when rates are dropping. Here is the 411 on Michael and Pam's current loan:
- 5/1 Adjustable Rate Mortgage current rate 5.125%. Principal and interest payment of $1154.31.
- 1st adjustment on June 1, 2008. Adjusting annually thereafter.
- Index: Monthly Treasury Average - projected value on June 2008: 2.948%
- Margin: 2.600%
- Lifetime Cap: 11.950%
Based on this information, their new rate is estimated at 5.548%. The new rate is rounded up to the nearest 0.125% = 5.625%. The new mortgage would reamortize at their balance at that time (estimated at $196,000) based on the remaining term providing Michael and Pam a principal and interest payment of $1218.29. This is without refinancing--no closing costs--no loan approval. Simple.
Woo Whoo's proposal is a 5/1 ARM with a prepayment penalty at 5.375% with a principal and interest payment of $1108.74 and closing costs of $2283.74 (not calculating how many years and what the penalty is for the prepay).
When Michael and Pam understood their options, they elected to stick it through with their existing ARM. Their rate should drop lower when it adjusts again next June. Michael was puzzled (to put it mildly) as to why the representative from Woo Whoo Bank didn't explain this to them. Especially since the loan that would be refinanced was with Woo Whoo.
It's painfully simple. The Loan Originator would not be paid for giving free advice. It's real easy for LO's and mortgage companies to target those with adjustable rate mortgages and plant fear of the adjustment. Or perhaps the Whoo Who Loan Originator didn't even consider how Michael and Pam would fair not refinancing.
This is why it's so important to review your mortgage Note and understand how and when it adjusts (if you have an ARM). If it all seems like too much to figure out, contact your Mortgage Professional to help you. If your loan originator is neglecting you (perhaps they've left the industry or do not care for clients after the transaction is closed), I'm happy to adopt your Washington State mortgage...no refinance required.
It's all about understanding all of your options and sometimes, that option is: do nothing.
