What is an ARM?
An ARM is an acronym for "adjustable rate mortgage." That refers to a home loan where the interest rate charged on the amount of money you're borrowing to purchase the home adjusts, or changes, over time as the government raises or lowers the rate of interest that banks charge each other for overnight loans (federal funds rate). The interest rate that banks charge customers on the money they borrow is tied to the federal funds rate. As the federal funds rate rises, typically so does the interest rate charged on mortgage loans. Likewise as the federal funds rate falls so does the interest rate charged on mortgage loans.

What is a subprime mortgage?
Most subprime loans are short-term, adjustable rate mortgages (ARMs). Those loans have an initial "teaser" interest rate that lasts 1-3 years and then adjusts every 6-12 months for the remainder of the life of the loan; the interest rates never reset lower than the initial teaser rate. Many borrowers obtained subprime loans either because they had previous credit issues and could not qualify for another loan, or wanted to qualify for a larger or more expensive home than they would be allowed with a non-subprime loan. In some cases borrowers who overstated their actual income were able to purchase a home beyond what they would be able to afford through a subprime loan.

How do I know if I have a subprime mortgage?
You may have a subprime mortgage if your loan:

• is an adjustable-rate mortgage with an initial "teaser" interest rate that lasts just 1-3 years and then can adjust every 6 - 12 months for the remainder of the life of the loan
• has an interest rate that "resets" or adjusts to a significantly higher interest rate than standard 30 year fixed-rate mortgage loans
• allows you to pay only the interest on your loan (called an "IO" loan) initially
• charges steep prepayment penalties
• required no or very little documentation about your actual income, outstanding debts and financial commitments, savings, etc. (called "low or no-doc" loans)
• required very low or no downpayment (called "low or no-downpayment" loans)

What does it mean for a mortgage to "reset?"
Subprime adjustable-rate mortgages offer a low "teaser" interest rate that will then adjust to a higher rate after 1-3 years (depending on the terms of the loan). When the interest rate adjusts, the monthly mortgage payment amount resets, or increases to reflect the higher interest rate.

My lender said that my monthly mortgage payment is increasing because my loan must be "recast" so that it is fully-amortizing. What does that mean and why is my payment amount increasing now?
For homeowners with an option ARM every 5 or 10 years the monthly mortgage payment amount must be adjusted, or "recast" so that the loan can be fully paid off through the remaining monthly payments - that's called a fully-amortizing loan. Lenders can raise the monthly mortgage payment amount by whatever amount is necessary to make the loan fully-amortizing. And if the homeowner has not been paying enough to cover the interest on the loan and the loan balance rises to between 110% - 125% of the home's value (meaning that the homeowner owes between 10 and 25% more on the loan than the home is worth) then lenders can immediately raise the monthly mortgage payment to make the loan fully-amortizing.

What does it mean to be "upside-down" on my mortgage?
The term "upside-down" means that you owe more on your home loan than your home is actually worth. This is not uncommon when home buyers purchase homes in very "hot" real estate markets - meaning that homes are selling rapidly and their sales prices are increasingly rapidly. When the real estate market then eventually "cools," meaning that the demand for homes begins to slow, prices begin to drop and the actual appraised value of the home begins to drop as well, to readjust to the slowing demand. If a homebuyer obtained a mortgage during a hot market, then when it readjusts and their property value drops the amount of money they still owe on the home can be more than what they could sell it for.

What is the first thing I should do if I can't pay my mortgage?

Contact your mortgage lender immediately!

If you're not sure who to contact or if for some reason you're nervous about contacting your lender you can:

• call 1-800-HOPE-NOW
• contact a HUD-approved mortgage counselor in your area
• Explain that you are either having difficulty paying your mortgage or you anticipate having difficulty paying your mortgage when it resets, and that you want to learn what options may be available to help you remain in your home. It will be helpful to have your mortgage loan number, which can be found on your monthly mortgage payment statement.

What does it mean to refinance my mortgage?
Refinancing is the process of paying off your existing home loan and taking on a new loan. Learn more about refinancing in our Home Buying 101 section.

Who do I call if I can't make my mortgage payment?
If you know the lender that holds your mortgage you should contact that office immediately. If you're not sure who holds your loan it's the company that you make your check out to each month. If you have your mortgage payment automatically withdrawn from a bank account and sent to your lender call your bank to find out the name and address for your lender and call them immediately.

Should I just pay what I can on my mortgage and then just make up the rest later when I can?
If you can't make your monthly mortgage payment on time and in full you should first contact your lender. Sending in a partial payment will trigger the foreclosure process. If you can afford to make some payment toward your loan amount you may be able to qualify for a loan modification. A loan modification is when the lender permanently changes the structure of your loan, creating a new monthly payment amount that you can afford. You will need to request a loan modification from your lender.

My mortgage company says it may be willing to accept either a short sale or a deed in lieu of foreclosure. What does that mean?
A "deed in lieu of foreclosure" is a legal settlement procedure where your mortgage lender agrees to accept the deed to your home (meaning that you give ownership of your home to the lender and you vacate the property) in exchange for forgiving the remainder of the debt you owe on the loan. If a lender says it would be willing to accept a "short sale" it means that your mortgage company will accept the proceeds from the sale of your house even though the amount does not cover the balance you owe on the mortgage. Few lenders are willing to accept these arrangements, but it is worth asking about as possible options if you fear foreclosure. Be aware that a short sale, or any type of debt forgiveness from your lender, may have tax implications and you should consult a tax professional or attorney to learn possible results. These options may also result in a negative credit rating so be sure you understand the implications before agreeing to any possible alternatives to foreclosure.

Why should I call my lender if they're just going to foreclose on my home anyway?
Lenders typically do not want to foreclose on homes. It is most often not in their best, financial interest to own a residence; they also do not want the burden of having to sell it. Even if you are behind on your mortgage payments and if you are unable to make your current monthly mortgage payment you should contact your lender to learn what alternatives to foreclosure you may be able to qualify for. Depending on your situation, your lender may agree to modify your loan (i.e. lower the monthly payment amount and extend the life of the loan), to grant you special forbearance (when a lender allows you to temporarily suspend having to make mortgage payments or reduces your payment amount), to refinance the loan, or another option that would create less negative impact than foreclosure.

I've seen ads for companies that will buy my house and take over my mortgage payments - should I do that if I can't make my mortgage payment?
Unfortunately solutions that sound too simple or too good to be true are usually scam artists preying on people in true financial distress-so these ads are likely to be too good to be true. One type of fraud that you describe here is "equity skimming." Equity skimming occurs when a buyer offers to purchase your home, pay off the remainder of your mortgage and then will re-sign the property back to you when you are able to catch up on your mortgage. However instead of paying off the remainder of the loan the buyer (who now holds the deed to your home) will collect rent money from you (because you are now renting the house from the organization you signed the deed over to), not make the mortgage payment and then the bank will foreclose on the home. While you may have signed the house deed to someone else you are still legally responsible for repaying the mortgage.

To avoid potential scams be sure that you:

1. Get everything in writing
2. Do not sign any papers which you do not fully understand
3. Get professional advice - check with a lawyer, an accountant and your mortgage company before working with an individual or another company on a possible arrangement to avoid foreclosure

I am a renter and I just found out that the property I live in is being foreclosed upon. What can I do?
While the law does not offer much protection for renters, it can be worthwhile to see what provisions were included in the legal contract that you signed to live in the property (if you signed a contract in the first place.) Check to see if there is a mention of any foreclosure-related rights you have, such as 30-day notification, return of security deposit and any rent money you paid in advance. You can also possibly obtain help by:

• contacting a legal aid office in your area to see what free or reduced-rate services and assistance may be available. A lawyer may be able to help you get money owed to you (i.e. security deposit, rent paid in advance, etc.) and negotiate with the lender foreclosing on the property to allow you more time to stay in the home.
• contacting the lender holding the loan on your property to see what options may be available. Depending on how your rent payment compares to the monthly mortgage amount on the property, the bank may allow you to continue living there for a short period of time. If you can qualify to purchase the property, the lender may be willing to discuss selling the home to you outright or to create a lease-to-own situation where your monthly rent payment is applied to the loan balance and over time. Lenders do not want to deal with vacant properties, which can be difficult to sell, subject to vandalism, etc., but they also do not want to play the role of landlord. They are most interested in selling the property quickly to recoup their loss.
• contacting your city or county human services department to determine if you can get help through a financial emergency assistance program to come up with needed money for a new place to live - i.e. first and last month's rent, security deposit, etc.
• if you have received notice from the bank holding your landlord's loan, contact the lender and ask if they would compensate you for leaving the property in "broom-swept" condition. By leaving the space clean and in good condition for the lender to put on the market quickly, you are saving the lender time and potentially money they would have to spend to clean the property.
• getting in touch with a local housing resource center or housing counseling agency to learn what housing alternatives may be available in your area.

How can I figure out how much money I can afford to spend monthly on a mortgage?
The general rule of thumb is that your housing expenses should be no more than 28 percent of your total monthly income and your total debt expenses (including your mortgage) should be no more than 36 percent of your total monthly income. To get an idea of how much housing expenses are currently adding up to compared to your income use our interactive budget worksheet.

How can I learn about other resources in my community or state that could help me hold on to my home?
Our Help for Homeowners Mortgage Center Resources offers website links to numerous resources nationwide and in your area that may be of assistance.