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Special section Mortgage reset

If your mortgage resets, you can refinance or sell. Even people who can't afford the new payment have options.

How it will affect me

Can't afford reset payment? Options exist

When the monthly payment rises on an adjustable-rate mortgage, or ARM, borrowers have a number of options. Most will simply continue to pay the mortgage, even if the payment rises along with the interest rate. Very simple, and a surefire way to prevent foreclosure.

An easy to use Mortgage reset calculator is a quick way to calculate what your payments will be when your adjustable-rate mortgage resets, so that you may develop a plan to meet those increased bills. If it is too late for that, and you can't afford the increased payments, then another way out is to sell the house quickly. A third option is to refinance the loan.

What if it's impossible to make the monthly payments anymore, and you owe more than the house is now worth? In that case, you can't afford to sell and no lender will refinance the loan. It's a dire situation, but foreclosure isn't the only possible outcome. Options include a repayment plan, forbearance, modification, deed in lieu of foreclosure and short sale. The final option is foreclosure, be it contested or "jingle mail."

Some of those options might not be available to you. That's up to the mortgage servicer -- the company that accepts your monthly payments. Before calling the servicer, familiarize yourself with these options.

Options if new payment is unaffordable
Repayment plan Short sale
Forbearance Foreclosure
Modification Negotiating with servicer
Deed in lieu of foreclosure    

Repayment plan
When you fall behind on the payments, you'll talk first with someone from the mortgage servicer's collections department. The collections department's aim is to get you caught up, and the sooner the better. The employees there will demand at least a partial payment now and the rest of the payment soon -- and a promise that you'll pay on time each month after you're caught up.

That's fine as long as your financial problem is short-term and you can afford to catch up and stay current on the payments in the future. If that looks unlikely, you need to talk to someone in the mortgage servicer's loss mitigation department.

The loss mitigation department's goal is exactly what it sounds like -- to cut the lender's losses when you fall behind. You'll need to be prepared before you talk to someone from the loss mitigation department, which will present one or more of the following options.

Effect of a successful repayment plan on your credit record: Minor to moderate, depending on how far you fell behind. Less than 30 days late will put a minimal ding on your record; 30 to 59 days late will put a minor but noticeable dent in your record; 60 to 89 days is worse. If you fell behind by 90 or more days, but eventually caught up, your credit score will drop quite a bit, possibly enough to put you into subprime territory. When you fall behind by 30 days or more, that is counted as a delinquency. Two or more delinquencies are worse than one.

The loan servicer might agree to suspend payments for a few months, until you get back on your feet financially. A forbearance isn't for an indefinite period; it might be for one or three or six months, and after that, you'll be expected to make full payments on time.

Forbearance is most commonly offered to disaster victims and people who have lost their jobs but who feel confident they'll find well-paying employment quickly. After the forbearance period ends and you've resumed making monthly payments, the service will expect you to pay extra each month until you're caught up. In most cases, you'll be expected to catch up within a year or 18 months.

Effect of a successful forbearance on your credit record: Minimal to moderate, depending on the circumstances. A disaster-related forbearance, such as the ones handed out en masse after Hurricane Katrina, isn't supposed to have a negative effect on one's credit report. If you fell behind on your payments because of personal issues (such as illness, job loss or divorce), the impact on your credit report is similar to that for a repayment plan.

-- Posted: May 29, 2007
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