New California Mortgage Disclosure Helps You to Choose the Right Home Loan

By Sheryl Landrum
Local Lender Columnist
Jun 10, 2008
More Mortgage Disclosures Might Be Needed

While many borrowers with Option ARMs and other nontraditional mortgage products understood that their payments didn't necessarily cover the interest they owed and that their balance could increase over time, that understanding didn't always translate to actual numbers. When interest rates began to adjust upwards, many homeowners found themselves surprised by their new mortgage payments; they also had home loan balances higher than what they had started with, as well as pre-payment penalties that they could not afford…they couldn't make these payments and the foreclosure crisis was in full swing.

Option Arms Have Become Safer Options

In California the Department of Real Estate (DRE) has mandated that borrowers be fully informed about the risks of Option ARMs (which are hard to find these days), interest-only loans, and adjustable ARMs. Option ARMs have also changed and most come with safeguards such as longer fixed-interest periods and caps limiting how much a payment can increase. California lenders are now required to provide a disclosure of "typical mortgage transactions" that will compare an interest-only and other loan programs to a fully amortized mortgage. The lender's mortgage calculator must provide the borrower with the following information:

• The interest rate for a fully-amortizing fixed rate mortgage, an interest-only fixed rate mortgage, a fully amortizing 5/1 hybrid ARM, an interest-only ARM, and an option ARM. For ARMs, the maximum rate is also disclosed as well as when the rate can adjust.
• The monthly payments in years 1-5 and year 6.
• The difference between the monthly payment and the borrowers' gross income
• The maximum payment if rates increase by 5% in year 6
• The difference between the borrowers' gross income and that maximum payment
• What the loan balance will be in 5 years and if the balance will be reduced, remain unchanged or increased

This new disclosure is designed to show borrowers a side-by-side comparison of how various loan programs work to enable them to make solid decisions about their mortgages. Be smart; look for this California disclosure form as well as your Good Faith Estimate and Truth-in-Lending Disclosure before committing to your new home loan.

About the Author
Sheryl Landrum is a Senior Loan Officer with Charter Funding, Inc. in Carlsbad, California.