Lots of my clients lately are asking the same question: why has my mortgage payment increased so much?
Interest rates are creeping up on variable rate loans, but not dramatically.
For most of those asking, it’s because the interest-only period of their home loan has run.
Borrowers forgot that lots of loans were written 10 years ago that promised low initial payments of interest only.
While it wasn’t a free ride, it was cheaper than a fully amortized, 30 year loan.
Appealing, and the interest-only feature probably allowed borrowers to believe that they could afford the house they were buying.
But, time’s up on many of these loans.
And math tells us that when 10 years have passed and the remaining life of the loan is 20 years, it will take larger monthly payments to retire the amount borrowed.
Understanding your loan
The easiest way to see if the loan terms explains the payment increase is to pull out the promissory note.
Many of these notes have some description of unusual terms on the first page of the note, right under the heading “NOTE”.
It may say explicitly, “10 year interest only” or “interest fixed” or “variable interest”. All of those are among the products peddled before the Great Recession.
The note should tell you when the “change date” on the loan is, and if variable, what index is used as a base for the interest rate calculation.
If you can’t find your note, you can ask the servicer for a copy using a Request for Information under RESPA. Here’s a how-to for making a request.
Alternatively, you can ask your questions about loan terms directly from the servicer, again, using a Request for Information.
There’s no charge to make such a request, but the timeline for getting an answer can be as much as 30 business days.
If you can’t make the increased payment
If the increased payment is unmanageable, consider seeking a loan modification from the existing lender.
An alternative is to see what your options are to refinance the loan with a new lender, a new loan, and another 30 years to pay.
Be proactive. The further behind you get on the existing loan, the less attractive you are as a borrower on a new loan.