Candice had suffered her share of misfortune alright. Not even one year removed from a divorce from her cheating husband she was diagnosed with bladder cancer. Fortunately, it was caught in the early stages and six months’ worth of standard chemotherapy was enough to wipe it out for a full recovery. She was never more ready to put the past behind her and start a new life.
So imagine her excitement the day she closed on her first mortgage loan and was handed the keys to her new home. But this was more than just one of many new Greenwood homes that had been built in a nice new addition; it was a symbol of her new life. This was a home she hoped to fill with fond memories for years to come.
And fill it with fond memories she did—for precisely two years. That’s because after two years of paying a very manageable $851 per month her payment jumped to a very smothering $1,500 per month. She couldn’t believe this was happening to her. The payment that she thought was fixed for the life of the loan was, in fact, only fixed for the first 2 years of the mortgage term. But as bad as this was, it was not her only problem.
Candice applied for a refinance only to discover that her home had dropped in appraised value. The maximum loan-to-value needed to refinance her loan just wasn’t there. Turns out, the mortgage company that originated her loan had also done the loans for a significant number of homeowners in this same community, many of whom had similar loan terms including a 2-year Adjustable Rate Mortgage (A.R.M.). The interest rates on all those 2-year ARMs had begun to adjust, leaving many homeowners unable to make their mortgage payments. The resulting foreclosures had created a declining market.
Candice was stuck with a loan she couldn’t afford. She had always been financially responsible, always paid her bills on time. To her credit, she tried to do the same in this situation. It didn’t take long for her to realize that this simply wasn’t a sustainable situation. In desperation she turned to credit cards, quickly racking up piles of debt just to make ends meet and not miss payments. When the cards reached their limits reality came crashing down. She started missing mortgage payments, growing ever more delinquent, until that dark day when she received the inevitable notice of foreclosure. Four months later, it was all over. Her new life as a homeowner, in retrospect, was as fleeting and ephemeral as it had been happy.
Sadly, this story is not limited to Candice and the other unfortunate homeowners who had bought homes for sale in Greenwood, hoping to live the American dream. Countless communities across the country had suffered a similar plight. Indeed, the mortgage crisis that began in June of 2007 with the collapse of two prominent hedge funds was the result of these very types of mortgage loans.
Sure, there were many borrowers who understood the loan terms to which they were agreeing. They probably thought they’d be ok to refinance when their interest rates began to adjust. What they didn’t foresee, and what they couldn’t have known, was that their fates were intertwined with the fates of all the other borrowers either didn’t understand the loan terms to which they had agreed or who were outright lied to by their loan officers and loan closing agents. “An adjustable rate rider? What’s that mean?” “Oh, that’s just a standard loan document. Nothing to worry about.” Yeah right, a standard loan document for anyone who has an adjustable rate mortgage. I’ve no doubt that exchanges like this took place routinely in the mortgage business.
If Candice’s story teaches us anything it’s that ignorance can be every bit as dangerous as distortion and deception. But to be fair, her ignorance is somewhat understandable—it’s not as if legal mortgage documents are easy for anyone to understand. But with so much at stake it’s worth it to take the time to educate one’s self on the most basic mortgage concepts before signing on the many dotted lines that one will inevitable encounter at the closing table.
If you’re thinking about buying a home in one of the many cities that make up the greater surrounding Indianapolis real estate market, such as Greenwood, Carmel, Fishers or Zionsville, remember that it all starts with the financing.
So here are some final tips:
- Never feel pressured to sign any document you don’t understand. If the explanation provided does not make sense then ask for clarification.
- Ask your real estate agent for some referrals to trusted loan officers. The agents at MSWoods Indianapolis real estate are always happy to offer suggestions. Call or visit MSWoods.com.
- If you are knowingly seeking an Adjustable Rate Mortgage to get a lower start rate then be sure you understand when the adjustments occur and by how much.