Boston Bankruptcy Attorney

Adjustable Rate Mortgages

An adjustable rate mortgage is a mortgage that has an adjustable interest rate. Many of these mortgages were “sold” to unsuspecting customers who were told not to worry about adjustments since the loan can just be refinanced. What many were not told was that there were prepayment penalties built into the mortgage that were still enforceable after the first rate adjustment.

The majority of ARMs are 30 year mortgages. There are three categories:

• 5/1 Loans: the payments are fixed for five years and then they adjust based on the interest rate for the next 25 years
• 3/1 Loans: fixed payments for three years and adjusted payments for 27 years
• 2/1 Loans: two years of fixed payments and 28 years of adjustable payments

Any ARM will have an initial interest rate that has little to do with the adjusted rates. The initial rate is merely a starting point. It is not tied to an index. It is the index plus margin that makes the new payment once adjustment has been made. When the first adjustment rolls around, a lot of loans allow for a higher increase than in subsequent adjustments. Some loans can jump to the maximum cap rate, meaning it could jump 5 to 6 percent, at once.

There are a number of options for people who simply cannot afford their increases. The first option is refinancing to a fixed-rate mortgage. This is a feasible option if the home owner has enough equity and can afford higher payments.

Talking to a reputable credit counselor can help arrange lower payments which can defer unpaid interest. This increases the loan balance but gets the borrower lower payments. Selling the house can work if there is enough equity to pay commissions and costs of sale through a real estate agent. Deeding the house to the lender under deed-in-lieu-of-foreclosure arrangement prevents foreclosure. It also means that no money will be received for the equity and also have a ding on the credit score.

Contact a Boston Bankruptcy Attorney

If your adjustable rate mortgage has forced you to consider filing for bankruptcy, contact the Boston bankruptcy attorneys of Joshua Spirn & Associates at 1-800-975-5346 to discuss your legal options and to schedule a consultation.