Contract Shock

For example, the lender in Mortgage Secret #33 offered a teaser rate for 12 months at 2.95 percent. The current index (see Secret #35) rate for this loan was 1.8 percent. The loan carried a margin of 2.75 percent. Add the index rate (1.8 percent) to the margin (2.75 percent), and you find that the initial contract rate totals 4.55 percent. Therefore, if the index remains unchanged during the first 12 months of the loan, the monthly payment will still jump up by 22 percent.

The payments for a $200,000 loan would figure out as follows: Teaser rate payment @ 2.95% / 30-year term = $822. Contract rate payment (assuming no change in the index) @4.55% / 30-year term at end of year 1 = $1,001.8

Now, assume this index moves up one point to 2.8 percent. Add the margin of 2.75 percent, and the adjusted contract rate becomes 5.55 percent for a second-year payment amount of $1,135. That's $322 a month more than the first-year teaser payments.

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