Loan terms can cast a shadow

A new study shows that many borrowers aren't as mortgage-savvy as they should be, and with interest rates on the rise, it's time to get to know your loan.

Getting a mortgage can be daunting, and it appears many home buyers are signing for major obligations with their eyes wide shut. That's like walking down an unfamiliar flight of stairs without a light.

A new study by a pair of Federal Reserve Board economists found that almost half of all Americans with adjustable-rate mortgages (ARMs) are in the dark about how their loans work, including the terms and the amount their loan payments could increase when interest rates rise.

The Federal Reserve system has raised short-term interest rates several times, and more increases could be in the wind. Because higher interest rates mean higher monthly payments, being in the dark about your ARM can spell trouble. It's up to you to make sure you fully understand the terms of your mortgage, said Liz Peter, loan officer with American Home Mortgage in Eden Prairie. "Make sure you read and understand the disclosure that lenders are required to give you at application time and at the closing," she said. "It explains exactly how your rate will adjust, so you can prepare for the worst-case scenario."

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