Mortgage Rates: Understand the Fine Print

The act of closing on a mortgage yields a dizzying array of documents. A borrower is required to sign page upon page of legalese-often with little understanding of what's contained within the paperwork. As one couple discovered, not knowing what you're signing can have a profound impact on your mortgage rate.

"Sign here, initial this, sign here, here and here." That, in a nutshell, sums up the closing process on a mortgage loan. Whether you're closing on a fixed- or adjustable-rate mortgage, it seems like there are reams of documents loaded with confusing legal language. But if you fail to take the time to understand what you're signing-particularly if the mortgage includes an adjustable rate-your blood pressure might rise at an accelerated rate.

The teaser rate that rose with a fury

One couple in Maryland had closed on what they thought was the best mortgage rate they could find. The lender, a local bank, was offering what the borrowers believed was a mortgage with a 1.95 percent mortgage rate, fixed for five years. What they didn't realize was that the astoundingly low rate was only for a month. The rate then adjusted upward to 8.3 percent. When they received their new mortgage, the couple was shocked, and eventually joined a victorious class-action lawsuit against the lender. Their claim was simple: The loan had not been accurately disclosed by the lender.

Disclosure: Whose responsibility is it?

During the trial, the bank argued that the mortgage broker who had sold the couple the loan had failed to accurately disclose the rate. They also cited numerous places in the loan documents where the adjustable nature of the loan had been stated. The couple's defense countered, saying that the description of the rate adjustment was not clearly worded. Regardless of who was truly at fault, it appears that when the borrowers signed the documents, they were not 100 percent certain of the mortgage rate.

This couple's tale is an invaluable lesson to anyone who takes out a home mortgage loan-particularly a bad credit mortgage. Adjustable rate mortgages can be tricky. No matter how many documents you sign, make sure that you understand exactly how the rate works. A little extra time at the loan closing can save you hours of headaches down the road.