No two mortgagors or borrowers have identical mortgage stories to tell. They might struggle to meet the bills, accrue interest rates for arrearages, or in desperation, refinance to lower their mortgage rates. In the case of two friends, Tom and Harry, their mortgage sagas end in different notes. One had to sell his house fast before it could be foreclosed, while the other is still paying the remainder of his 30 year mortgage.
Tom s Mortgage
Tom got a mortgage to buy a house for his family. He had a regular job, paid his taxes on the dot, and saved up $5000 in four years time, but his credit score was a little botched. Yet, he was lucky to get an Adjustable Rate Mortgage (ARM) despite his credit score. He chose an ARM because the monthly payments were low compared to the fixed rate mortgage his friend Harry got.
Tom was not aware that the lender added an additional 3 points to the margin of his mortgage amount. At the time, the index or benchmark of the going rates stood at 4 . Tom s rate was fully indexed at 7 , the sum of the margin and the index. Should the index decrease or increase, Tom s monthly payment would likewise do the same. The margin would, however, remain constant throughout the loan term.
Fortunately, the mortgage had limitations. It had a cap on how high or low the mortgage rates would go. But Tom had the surprise of his life when the monthly bill climbed a few hundred dollars more. The interest rate had reset and the honeymoon was over. Tom had to find ways to meet the added expense. His wife got a part time job and they were able make payments. When the housing market crashed, Tom and his wife could no longer meet the bills.
They had to sell the house quickly so they could have a little cash from the sale after expenses. They barely scraped by because the prices of houses plummeted. It was the start of a long, dark night for the couple.
Harry s Mortgage
Unlike Tom, Harry wanted stability. He chose the 30 year fixed mortgage, although the interest rate was higher than Tom s ARM rate. He was self employed, while his wife worked as a dental assistant. His mortgage carried added charges such as insurance and the fees incurred during the processing of his mortgage papers. But Harry had an advantage over Tom. He managed his credit card payments carefully.
The rate of Harry s loan remained steadfast. Harry knew he was paying double the amount he borrowed. In 30 years time, he would be paying the mortgage company double the amount he owed, plus a little extra.
Harry is now thinking of getting a refinance after 10 years. He wants to lower his rate. He would go for a 15 year fixed rate mortgage. Meanwhile, he is saving up money to cover expenses for the second loan. At the rate things were going, Harry and his family are foregoing luxury expenses; dinners out and even a new pair of denims are eschewed.
Tom s Omissions and Harry s Foresight
During his mortgage application, Tom failed to realize that the rise in mortgage rates would shoot way up beyond his means. He did not also consider this possibility and their incapacity to cope with high interest rates. Had Tom s credit score been good, his mortgage rates would have been lower.
Harry was more attuned to reality. Although the mortgage is rather a drain on their finances, Harry and his family keeps on looking ahead towards a mortgage free future. Tom and Harry s experiences are lessons everybody can learn from. Mortgage rates are not made in heaven; they re made by the politics of business.
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