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CAUTION NEEDED FOR ARM LOANS
The Note Rate displayed on your closing papers may be much lower than what you are actually being charged. Consumers need to know what questions to ask, and how the answers will affect their finances.

INTRODUCTORY RATES
A warning is in order to buyers considering any mortgage loan featuring an adjustable interest rate. Some lenders are offering "introductory" interest rates several percentage points less than the actual "index plus margin" adjustable rate used to establish the adjustable note rate.

These "Introductory" rates conceal the true cost of the loan, make it nearly impossible to comparison shop among lenders, and guarantee that the interest rate will adjust the maximum amount each period until the note rate adjusts to equal the "index plus margin" rate, regardless of whether other interest rates rise, fall, or remain stable.

For instance: Let's look at the following loan

THE ADJUSTMENT
Assuming that the note rate can adjust a maximum of 1 percent up or down each adjustment period, and even if LIBOR remains unchanged, the note rate will adjust a full 1 percent each period until it equals 9.9% the sum of the Index and the Margin ... even though the initial rate quoted was 7% and the Index (in this case, LIBOR) remained constant.

Simply put, because the Note Rate shown on the closing documents was not the true Note Rate, our monthly mortgage payment automatically increased $300 over the first 18 months of the loan (1% every 6 months), even though the Rate Index (LIBOR) did not change.

THE LOOPHOLE
The lender is required to disclose the basis for the Note Rate, but is not required to disclose whether the Quoted Rate is an Introductory or Actual Note Rate.

Careful reading of the RESPA documents will not reveal this loophole.

WHAT TO EXPECT
Only by determining in advance what the Index is, how it is calculated, and what the margin percent will be, and comparing their sum to the initial "Note Rate", can the borrowers protect themselves from a well hidden, potentially devastating mortgage payment increase.