Keeping Tabs on Mortgage Adjustments : Indexes Govern Ups and Downs of ARMs Payments

Janet James was puzzled. For months, she says, all her friends who had adjustable-rate mortgages said the interest rate on their loans was going down, but hers “just kept going up.”

Confused, James, of Los Angeles, called her lender. She was told it wasn’t a mistake; the index used to make periodic adjustments on the loan was rising.

“It’s all right here on the computer screen,” James says the institution’s representative told her.

Unsatisfied, she went to a library to find out how the index used to calculate her new loan payments had performed over the past several months. Indeed, the rate had been falling , not rising. The bank had been overcharging her.

Accuracy Can Save

James went to her lender’s office, armed with the information. “As it turns out, they had changed their computer system about six months earlier, and they were figuring my changes using the wrong index,” she says. Result: A $1,300-credit toward James’ next loan payment.

“Those kinds of mistakes don’t happen very often,” says Shirley Parish of the Federal National Mortgage Assn., the nation’s biggest provider of mortgage credit. “When they do, it’s almost always by accident, not on purpose.”

Still, says Parish, knowing how to verify the accuracy of changes made to the interest rate on your ARM could save you hundreds or even thousands of dollars if you discover that you’ve been overcharged.

“The two most important things to do is to make sure the lender is using the right index rate, and to make sure it’s using the proper margin,” says Pete Mills, senior research analyst for the California Assn. of Realtors. “Fortunately, those are two pieces of information that are relatively easy to get.”

Start by digging up your original loan documents. You need three items from this paper work to perform a basic check of the lender’s accuracy.

Linked to Index

The first is the index that the contract states will be used to make periodic adjustments. Most ARMs in the West--and, increasingly, adjustables issued in other parts of the country--are linked to movements in the 11th District Cost of Funds Index.

The Federal Home Loan Bank of San Francisco publishes the index at the end of each month, but the figure represents the prior month’s rate. So, the most recent figure--which was published at the end of August--is the July rate.

The second item is the clause that describes how the lender will make periodic rate adjustments. Contracts typically stipulate that the lender will use the most recent index rate that’s available 30 or 45 days before the change in your rate takes effect.

The final item you need from the loan documents is the lender’s “margin.” This is the lender’s mark-up, which covers its expenses and provides it with a profit. If the index rate is 7.525 and the margin is 2.5 points, the interest rate on your loan will be 10.025%.

How to Check

Although different ARMs are adjusted differently, here’s a typical example of how you can check your lender’s accuracy:

Say you get a notice that says your payment will be adjusted Oct. 1, and that your new rate will be 10.093%. You believe that’s too high.

Your loan papers state that your rate is linked to changes in the 11th District Cost of Funds, and--according to your contract--the change reflects the available index rate 30 days before the adjustment takes effect.

Here’s where it gets a bit tricky. Counting back 30 days before Oct. 1, you arrive at Sept. 1. Since the Cost of Funds Index is published at the end of each month, the most recent figure available on Sept. 1 was published Aug. 31--and it reflects the July rate.

Obtaining Figures

The best way to get the July rate is to request it from the Federal Home Loan Bank of San Francisco, Public Information Office, P.O. Box 7948, San Francisco 94120.

(If you plan on checking your lender’s calculations on a regular basis, ask the FHLB to put you on its monthly mailing list.)

Your research shows that the July Cost of Fund Index was 7.593. If the letter that the lender sent you to announce the Oct. 1 rate adjustment uses a different figure, the lender may have erred.

Remember, though, that you also have to take into account the lender’s margin. If the margin is 2.5 points and the index is 7.593, then the 10.093% rate that’s on your statement is correct.

Contact Lender

However, if you add the index rate and the lender’s margin and come up with a figure that differs from the rate the lender wants to charge, contact the institution immediately.

“Talk to someone in the loan-servicing department first,” advises Dennis Casey, a vice president with San Diego-based Home Federal Savings. “If you’re not happy with the answer, or if you still don’t understand, ask for his supervisor.”

A lender that has accidentally overcharged a borrower can rectify the matter in a variety of ways. It might send a reimbursement check to the homeowner, apply the overcharge amount directly toward the the outstanding balance of the loan, or give the borrower a credit that could be applied to the next month’s payment.

Firms Provide Service

Borrowers who really want to scrutinize their lender’s figures can also calculate whether their outstanding loan balance has been reduced by the proper amount. It’s a complex process that can be performed with the help of a high-tech financial calculator, or with a standard calculator and a book of ARM payment tables.

For about $25, there are a few firms willing to do all these calculations for you.

One of the biggest firms is Loantech Inc., which uses computers to make sure the lender has been using the proper index rate for the past five years. It also calculates the proper monthly payment and makes sure that the loan balance at the end of each adjustment period is correct. Its address: P.O. Box 3635, Gaithersburg, Md. 20878.

While the 11th District Cost of Funds is the most popular index used to change the rate of adjustable-rate mortgages, many homeowners have loans pegged to changes in other indexes.

For data on Treasury bill rates, write to Board of Governors, Federal Reserve System, Publication Services, MS-138, Washington, D.C. 20551. Ask for publication “H.15,” and specify the week for which quotes are desired.

For data on the National Average Mortgage Contract Rate for Major Lenders on the Purchase of Previously Occupied Homes, the National Average Cost of Funds to FSLIC-Insured Institutions, and the National Monthly Median Cost of Funds Ratio, write to the Federal Home Loan Bank Board, Office of Policy and Economic Research, 1700 G. St. NW, Washington, D.C. 20552.