YOUR MORTGAGE : Check If Your ARM Payment’s Too High

If you have an adjustable-rate mortgage that seems as if it only moves upward, take heart: Rates on most ARMs have finally started falling, and further declines appear in store.

But if your rate is dropping slower than honey from a baby bottle, it might be because your lender has been miscalculating your interest rate.

Lenders take painstaking care to avoid making errors on your monthly mortgage statement. But mistakes happen. A computer glitch, an errant typist or a variety of other mishaps could result in billing errors.

Knowing how to verify the accuracy of changes made to your ARM could save you hundreds or even thousands of dollars if you discover that you have been overcharged.

“Double-checking interest-rate changes isn’t easy, but it can be done,” said Sam Lyons, a senior vice president of the Beverly Hills-based Great Western Bank. “You’ll need to start by digging up your original loan papers.”

First, read your loan documents to determine which index is used to make your periodic rate adjustments.

About two-thirds of ARMs in the West and in many other parts of the country are linked to changes in the 11th District Cost of Funds Index, according to Pete Mills, a lending expert with the California Assn. of Realtors. The index is a composite figure that reflects lending institutions’ own borrowing costs.

The Federal Home Loan Bank of San Francisco publishes this index at the end of each month, but the figure represents the prior month’s rate. So, the most recent figure--which was published Nov. 30--is the index rate for the month of October.

The second bit of information you must draw from your loan documents is the clause that details how the lender will make its periodic rate adjustments. Most mortgage contracts state that the lender will use the most recent index that’s available 30 or 45 days before the change in your rate takes effect.

The final item you need from your loan papers is the lender’s margin. The margin is basically the lender’s retail markup, which covers its expenses and provides it with a profit. If the index rate is 8.5 and the margin is 2 1/2 points, the interest rate on your loan would be 11%.

Although different types of ARMs are adjusted differently, here’s a typical example of how you can check the accuracy of changes to your mortgage’s interest rate:

Assume you get a notice that your payment will be adjusted Jan. 10, and that the new rate will be 10.893%. You want to make sure the change is appropriate.

Checking your loan papers, you find that your interest rate is linked to the 11th District Cost of Funds Index. Changes are based on the available index rate 30 days before the adjustment takes effect.

Here is where it gets a bit complicated, says lending expert Mills. Counting back 30 days from Jan. 10, you arrive at Dec. 10. Since the cost of funds index is published at the end of each month, the most recent figure available on Dec. 10 was published Nov. 30--and it reflects the October rate of 8.643.

The best way to get the most recent rate is to check your local newspaper. The Times’ publishes the 11th District Cost of Funds Index rate on Page 3 of its Saturday Business Section.

Or you can get a recorded message that lists the 11th District rate and another popular index--the National Final Average Contract Interest Rate for Previously Occupied Homes--by telephoning the Federal Home Loan Bank at (415) 393-1418.

If the letter announcing the pending rate adjustment differs from the October rate of 8.643, it’s possible that the lender may have made a mistake. But before you place an irate phone call to the customer service department, remember that you must also take into account the lender’s margin.

If the margin is 2 1/4 points and the index is 8.643, then you should be charged 10.893%. If you add the index rate and the margin together and come up with a figure that’s different from your lender’s calculation, call your lender immediately.

“We’d have one of our representatives look over the account and double-check the adjustment,” said Great Western’s Lyons. “If there’s a problem, it won’t be too hard to fix it.”

A lending institution that has mistakenly overcharged a borrower can remedy the problem in a variety of ways, Lyons said. It might send you a check for the amount you have overpaid, or ask if you would like the money applied directly to your loan balance. Or, it may issue a credit that can be applied to your next loan payment.

If you really want to scrutinize your lender’s calculations, you can also determine whether it has been reducing your loan balance by the appropriate amount. It’s a difficult process that can be performed with the help of a high-tech financial calculator or a standard calculator and book of ARM payment tables.

For $25 to $50, there are a few firms willing to do such calculations for you.

One of the largest firms is Loantech Inc., which--for a $49 fee--uses computers to make sure the lender has been applying the proper index rate for as long as you’ve had the loan. It also determines the appropriate monthly payment and makes sure that the balance at the end of each adjustment period is correct. Loantech’s toll-free number is (800) 888-6781.

While the 11th District Cost of Funds Index is the most popular index for ARMs, it’s certainly not the only one.

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

The Times publishes the prime rate, federal funds rate and three-month and six-month Treasury bill rates in its Monday Business Section.

For information on 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.