Hybrid home loans take several forms: 2/28 loans, 3/27 loans, 5/1 ARMs, and 3/1 ARMs. With 2/28 and 3/27 loans, the rate is fixed for two or three years and then adjusts annually, biannually, quarterly, or monthly for the remaining term. With 5/1 and 3/1 ARMs, the rate is fixed for the first 3 or 5 years, and then resets annually.
Follow these steps to avoid foreclosure if you could afford the payments at the teaser rate, but have received notice that your loan is due to reset at an unaffordable rate.
Step 1: Try to Refinance
If your interest rate has not yet reset and your loan balance is lower than the current value of your home, contact your lender and several other lenders to ask about refinancing into a fixed-rate mortgage. Your payment may be slightly higher than your current payment, but you will always know what you owe.
You may not be able to refinance if you don't have equity in the home. In that case, move on to step 2.
Step 2: Ask for a Loan Modification Program
Many lenders now offer loan modification programs to either temporarily delay the new interest rate or transition you into a new loan. One such program is the FHA Secure program. You may qualify for the new program if the following factors apply:
- the original loan was not an FHA ARM
- your payments prior to the reset were current
- you had no late payments in the six months prior to the reset
- you have enough income to make payments under a new mortgage
- you have at least 3% equity in the home
- the loan balance is less than $362,790
- your rate has reset already or will reset by December 31, 2008.
If you don't qualify under the above terms, you may have to consider other options.
Step 3: Offer a Short Sale or Deed-in-Lieu
If you don't qualify for a new mortgage, or can't afford the payments under a new mortgage, than you may not be able to save your home. You can still salvage your credit, though. Ask if the lender will accept a short sale or a deed-in-lieu of foreclosure. Either option is cheaper for the lender than foreclosure, and less damaging to you.
Step 4: File for Bankruptcy
You may consider filing for Chapter 13 bankruptcy if you have other debt payments that prevent you from paying the mortgage. In most cases, you can keep your home under chapter 13, although you will have to repay some of the other debts under an extended repayment plan. Filing for bankruptcy will also temporarily halt the foreclosure process. You will have to remain current on the payments while you work through the system or the foreclosure will be renewed.
If none of these options are available to you, then foreclosure may be your only choice. Most homeowners are able to avail themselves of the above programs in order to avoid the black mark of foreclosure on their credit reports and possibly save their homes.