The only way to really know how your mortgage works is to read the loan papers. That can mean making your way through a 2-inch stack of documents. Even then, you may run into trouble.
Berns, the Hortons' lawyer, is preparing a lawsuit alleging that the disclosures offered by mortgage lenders are insufficient.
"I challenge anyone to pick up a set of these loan documents and tell me what is going on," he said.
In Wisconsin, a judge cleared a similar suit for trial, saying, "An ordinary consumer reading the defendant's disclosures would be confused about the cost of the loan."
Lenders say they make every effort to ensure that borrowers understand the terms of their loans.
"We have every interest in making sure that all of our borrowers understand the product we are offering and get the loan they seek," said Tom McCormick, executive vice president and general counsel at Chevy Chase Bank in Maryland, which gave the Hortons their option ARM. "We get no benefit out of dissatisfied borrowers."
When it makes option ARM loans, Chevy Chase Bank provides a one-page disclosure form spelling out the risks of these loans in large type.
Your broker works
on commission
The bigger your loan, the more your broker makes -- and high fees end up fattening the broker's wallet.
Jeff Lazerson, president of a Web-based shopping service called Mortgage Grader, said high commissions for high-cost loans were one of the biggest conflicts in the real estate industry.
Consumers go to a loan broker to help them find the best deal among competing mortgage lenders, but the broker is paid by the lender based on the profitability of the loan, he said.
"The broker's incentive is not aligned to the interest of the consumer," he said. "It is truly an adversarial relationship."
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The Hortons describe their mortgage experience as a year-long nightmare.
"I am embarrassed by this," said Jamie Horton, who also owns a rental home in Yorba Linda that she bought before getting married. "We are educated and successful people. I can't believe we were taken in like this."
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Glossary
Option ARM: An adjustable-rate mortgage designed for people with inconsistent incomes. It gives borrowers four amounts to choose from for their payment each month.
Adjustable rate: The interest rate on the loan after the first month. The rate can change every month. It has two components: the index and the margin.
Index: A widely followed gauge of market interest rates that is used to set a mortgage's adjustable rate. A common index is
LIBOR, an acronym for the London interbank offered rate.
Margin: A fixed amount that is added to the index to calculate the adjustable rate. For example, if the index is 4.36% and the margin is four percentage points, then the adjustable rate is 8.36%.
Teaser rate: The interest rate that applies during the first month of the loan's term. It is usually much lower than what the regular adjustable rate on the loan would be.
Negative amortization: An increase in the total balance owed on the loan. This occurs in any month that you make the minimum payment, because that amount is less than the interest accruing on the loan that month. The unpaid interest is added to the loan's principal.
Equity cap: The highest the mortgage principal is allowed to rise to, usually 115% to 125% of the original loan amount.
Prepayment penalty: An extra chunk of interest -- in the thousands of dollars -- that you must give your lender if you pay off the mortgage in the first few years (because you sold your home or refinanced). Although unusual on standard mortgages, prepayment penalties are common on option ARMs.
-- Kathy M. Kristof
