Dear Dr. Don,
My husband and I refinanced our loan in 2006. We didn't have a clue that the loan they gave us was something called an adjustable-rate mortgage. Our payments have been going up every year. They went up from $646 to $801. We have put about $70,000 into it, and the mortgage is not coming down -- the principal and interest rate keep going up.
So, we went to different banks to get a fixed rate, and they are telling us that we have some kind of hold on the loan for three years. It will be three years in 2009. How does the year 2009 look for interest rates?
We have never been late on the mortgage and never will be -- it just frustrates us that we refinanced for $330,000 and the last statement shows we now owe $336,000. Because the loan balance isn't coming down, I sometimes feel like I want them to foreclose on the house so we can start over.
Everyone sends paperwork for us to refinance, but when we explain the loan they never call back. Even our current bank will not help us. So, when will it be good to get rid of it? Next year? If we could do so now we would have.
Our advice is that people shouldn't sign anything without consulting a lawyer. This is the first time we did and look what happened. I can't understand why our bank would not help out a person who has a loan with them. Instead, they would rather we go somewhere else.
Abandon the thought that foreclosure is the way to start over fresh. It's not. You'll wreck your credit and face a multiyear uphill battle to get it back on track. It's one thing to be forced into foreclosure. Voluntarily choosing it is a mistake.
Your loan balance increases with a negative amortization loan because the monthly mortgage payment isn't large enough to cover the monthly interest expense.
I don't quite understand your comment that you've put more than $70,000 into the mortgage and still have experienced negative amortization of $3,000 since you refinanced. A teaser rate on the mortgage, combined with negative amortization provisions, could explain at least part of that expense.
Making additional principal payments doesn't reduce the size of the required monthly payment; it shortens the life of the loan and changes how the monthly payment is split between principal and interest.
For the monthly payment to be reduced based on additional principal payments, the loan has to be recast. See the recent Ask Dr. Don column, "
Lender not obligated to recast mortgage," for more information on this point.
The Federal Reserve has lowered its targeted federal funds rate by 3.25 percent over the past nine months. The next loan reset on your ARM could be at a much lower interest rate. You need to look at the terms of your loan to estimate what is going to happen with the loan at the next loan reset. You could be pleasantly surprised.
You can track the interest rates commonly used in calculating these resets using Bankrate's
Rate Watch page.
I don't know of a hold that prohibits refinancing your mortgage. It's more likely that your mortgage has a prepayment penalty in the early years of the loan. That penalty makes it hard to justify refinancing.
I can't tell you where interest rates will be in 2009. Nobody can for sure. For the best idea of where interest rates are and where they might be headed, you should read Bankrate's weekly
Mortgage rate analysis. I have a copy
delivered as an e-mail every Thursday morning.
I think it would be money well spent to consult with a fee-only financial planner to discuss the terms of your mortgage and the advisability of refinancing that mortgage.
Bankrate provides a
directory of Certified Financial Planner professionals. Make sure to ask potential candidates if they work on a fee-only basis.
Your suggestion to not sign mortgage documents without having your attorney present is sound advice. It's even more important to avoid signing a loan document without understanding its terms. The lender has a responsibility to explain these terms and you need to understand them prior to signing the documents.
Ideally, the understanding part takes place when you arrange for financing and not at closing.