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Adjustable rate, home equity loans can confuse borrowers

By HELEN HUNTLEY
Published November 12, 2006

If you have an adjustable rate mortgage or home equity loan, do you understand its terms? Do you know how high your interest rate could go up and how soon that could happen?

Are you sure?

Researchers at the Federal Reserve say many homeowners with adjustable rate loans underestimate how much their interest rates can change or are clueless in the matter. The problem is worse for households with below-average incomes and education.

"This research suggests the need for greater financial literacy and increased access to financial counseling," Fed chairman Ben Bernanke said in a speech this month.

Education and counseling are needed, but I'd like to see a solution that starts with the mortgage industry. Lenders are creating confusing products and promoting them to people for whom they are inappropriate. To make matters worse, those that lend through independent mortgage brokers aren't doing enough to make sure the brokers honestly represent their products. I'd like to see them held accountable.

Nowhere have these problems been more apparent than with "option" mortgages, which give borrowers several payment choices. Lots of choice is great if you're a sophisticated borrower, but it can be seriously confusing and sometimes harmful if you are not.

Many mortgages have minimum payments that don't cover the interest due, so the balance grows. The option with the lowest starting payment can morph into the one with the highest, leaving a borrower unable to afford the house.

Even some home equity loans come with confusing payment options these days.

Lillian Probst thought she understood the terms when she was took out an "Access 3" home equity credit line from SunTrust Bank. But it turned out the St. Petersburg retiree had gotten some important points wrong. When she used one of her new checks to buy a computer, her interest rate was higher than she expected. It wasn't the fixed rate that she thought she was getting, but one that fluctuated with market interest rates. And because she wasn't watching her statements closely, it took her months to discover what was happening. She's still trying to straighten things out.

"When you get to be 85 years old and you've been in a serious accident like I have, your thinking facilities don't operate properly," she said. She called me, she said, because she didn't want other elderly people to lose their hard-earned dollars.

After hearing her tale of woe, I went to the bank's Web site to learn about Access 3. I saw right away how a borrower could be confused.

Whether you get a fixed rate or an adjustable rate depends on which check you use out of the packet the bank gives you. The Web site displays four different interest rates ranging from 5.24 to 8.25 percent, plus small print that says your variable rate could go as high as 18 percent. There are three payment options, including interest only.

"If you're not in banking, it can be complex, but it's also probably one of the best products out there," said Bill Peele, executive vice president of SunTrust Tampa Bay. "It gives people a lot more flexibility than a lot of other banks. We've been offering it for several years and the customers just love it."

And I don't doubt him. I'm sure the product works well for many borrowers, but that doesn't make it right for everyone who wants a credit line.

Of course, Bernanke is right, too. We do have to educate ourselves before buying any financial product. Know what you're getting into before signing on the dotted line.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at blogs.tampabay.com/money.

[Last modified November 12, 2006, 01:07:58]