There has been much talk of the Bush administration planning to help subprime borrowers whose loans are due to reset to higher interest rates next year. But hundreds of thousands of borrowers that obtained the Pay Option ARM with good credit will see sharp increases in their payments if unable to refinance.  These homeowners could be the next wave of trouble in the mortgage crisis. 

If they chose to make only the minimum payment on a regular basis, their loan balance has increased.  Terms of the Option ARM allow for a maximum loan balance cap usually at 110% of the original loan balance, which then require the fully amortized payment over the remaining term.  This will be a problem where home prices are falling and not enough equity remains to qualify for a refinance. Borrowers who get in too far over their heads may not be able to refinance their loans or even sell their houses for enough money to pay the loans back. This may contribute to more foreclosures.

Option ARMs generally carry a low introductory rate -- in some cases as low as 1% -- and often have high prepayment penalties that make it expensive to refinance. With lending standards getting tighter, refinancing may be impossible in any case.  Here is an idea of the predicted Option ARM loans over the next year:

I highly encourage anyone who is currently using this product to inquire with their mortgage professional as to a safe plan.  HOPE Lending is committed to providing practical mortgage solutions for each borrower that make sense to their individual situation.