The loan bomb

That adjustable-rate mortgage may have seemed ideal when you got it.

Now, you're not so sure.

Its low "teaser" interest kept the monthly payment affordable. Oh, sure, you knew that someday it would reset - but by that time your house's value would have risen and you'd have no trouble getting a fixed-rate loan. Or maybe you figured you'd be able to sell for a nice profit and move up. Or you'd get that big promotion or new job and easily be able to afford the higher payment.

What you hadn't bargained on was the housing slump and the subprime mess. Home sales have plummeted, values are flat or falling and many refinancing options have vanished as lenders have shut down programs and underwriters have tightened standards. So that ARM has become a time bomb. You know it's out there, but when you hear that ticking sound, you just want to run away like Captain Hook fleeing the crocodile.

Resist.

Don't assume that the government-backed teaser rate freeze announced last week will bail you out. If you qualify, fine and good - you'll get a five-year breather before you have to come up with a long-term solution. But there are lots of hoops to jump through. You have to have decent credit, but not decent enough to get refinancing. Under 3 percent equity. A subprime loan made between Jan. 1, 2005, through July that resets between Jan. 1, 2008, and July 31, 2010. Etc., etc. You get the picture.

So, like a good Scout, be prepared.

Whether your ARM will reset in a month or in a year, it's crucial to get a handle on what's coming as early as possible, mortgage experts say. Planning ahead and acting before the loan resets can mean the difference between staying current and falling dangerously behind on payments.

"None of us can predict what the market is going to do," said Hunter Bloch, vice president of Annapolis First Mortgage and president-elect of the Maryland Association of Mortgage Brokers. "I would say you want to start looking six months before the reset date to give yourself time to plan for refinancing," or other options.

If it's any comfort, you're not alone. That all-important date is fast approaching for a couple of million borrowers.

About $185 billion in ARMs are scheduled to reset for the first time next year, according to an estimate by Fannie Mae, based on statistics from LoanPerformance, an independent provider of mortgage market data. Lenders should advise borrowers, usually with about 30 days' notice, that their interest rate is due to adjust. But don't wait. Haul out those loan documents and check the reset date, the index the rate will follow, the margin - which gets added to the index - and any caps on that margin.

Because indexes are recalculated monthly, you won't know precisely what the new, higher rate will be until 30 to 45 days before the reset date. But you should be able to use the current index to get a ballpark figure.

"If you are one of those folks who got in by the skin of their income, at 5 percent and ... you can't manage any increase in monthly payment, this is where the troubles begin," says Keith Gumbinger, a vice president with HSH Associates. "It's not too late to look at your budget and see if adjustments can be made to spending habits to help offset an increase," possibly, he suggests, cutting back on expenses such as Internet, cable or cell phone costs or reducing retirement savings contributions.

If you're really stretched, contact a housing counselor before the loan resets. Lisa Evans, deputy director of the nonprofit St. Ambrose Housing Aid Center in Baltimore, says counselors can help you work through your budget and sort out available refinance products.

Options differ depending on the situation. Maybe you got an appropriate adjustable loan where rates will still be lower than you could get by refinancing. The best course of action may be to do nothing, especially if you have some years left on a currently lower rate, or if you plan to move soon.

But if you're in a subprime loan where the interest rate will leap into the double digits, think about refinancing as soon as possible.

Those who should be especially concerned have the so-called 2-28 and 3-27 loans. Borrowers typically pay just the interest for two or three years, then begin paying principal and interest for the remainder of the 30-year term. The loans usually provide for huge jumps in interest rates. Other troubling arrangements are the 80-20 loans - a combination of a first and second mortgage to cover 100 percent of a home's price. The rate on the first mortgage may or may not be adjustable, but in almost all cases the rate on the second mortgage is set to shoot way up.

Borrowers with such loans, "should run, not walk to get out of the product," said Bill Ariano, deputy director of Community Development Administration for the state.

A little-used state program has been set up to help borrowers refinance from ARMs before they get into trouble. The Department of Housing and Community Development's "Lifeline" Refinance Mortgage program is offered through the state's lender partners for borrowers who meet credit and maximum-income requirements - and who are not behind on mortgage payments.

"I refer to it as a flu shot," says Ariano. "For those that have gotten into mortgages that are going to negatively affect them in the future, this is an out for them early on. One of the major problems is people are reacting too late to avail themselves of any programs, including those that are more liberal than ours."

If your loan has already reset, you may be able to get an FHA loan. It's new FHA Secure program is aimed at creditworthy borrowers who were OK until their rate reset and are now behind.

"For people who are middle-class homeowners that are just impacted by being in the wrong program, FHA is their solution," said Allan Gushue, president of Bi-Coastal Mortgage Inc. in Lutherville.

Borrowers with poor credit, high debt or little equity may find the refinance avenue closed and should immediately contact their mortgage lender. Lenders will sometimes allow a repayment plan, reduced or no payments for a limited time or an extension of the payoff terms. If none of those options pan out, you may be forced to sell or end up in foreclosure. The trouble is, with home values sliding, you may not be able to sell for enough to pay off the mortgage and cover selling costs.

"We're still seeing people too late, who've already reset and are behind," said St. Ambrose's Evans. "We very much would like to see people before they reset, when there are options.

"If somebody is going to adjust soon or within the next year, they should be talking to a counselor now and getting into a fixed-rate loan product. When there's a call on a Tuesday afternoon that a foreclosure sale is in the morning, there's nothing any of us can do."

lorraine.mirabella@baltsun.com

Getting ready for the reset

Read the loan documents. Know when your interest rate resets, which index it is tied to and how much margin will be tacked onto that, and whether there is a cap.

Estimate the new rate; calculate the new payment.

Analyze your budget. Look to cut expenses. Contact a housing counselor.

Check refinancing options from brokers or banks. Or start with the state housing department's Lifeline Refinance Mortgage Program. Phone: 877-462-7555 Web site: www.mdhope.org

To find out whether you can refinance or qualify for a rate freeze, contact HOPE NOW. Phone: 888-995-HOPE (888-995-4673) Web site: www.hopenow.com

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