During the housing boom, a combination of optimism and desperation caused many people to purchase their homes with Adjustable Rate Mortgages (ARMs). When you are seeing double digit growth rates in property values and can get in at 3 percent for 3 years it was too tempting for many people.

Now they will have to pay the piper as those with ARMs are looking at the first of many resets of their mortgages. A reset is when the fixed length of the ARM is over and the bank adjusts the mortgage to a new interest rate.

If you are in a good financial place, you can refinance the loan to a new ARM or Fixed Rate Mortgage. However, if circumstances have gone poorly for you, or you have lost equity in your home, the interest rate bumps can be disastrous for you.

More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007, estimates Moody’s Economy.com, a research firm in West Chester, Pa.
Most borrowers will be able to cope with the coming wave of resets, in some cases by refinancing with new loans, lenders and mortgage industry analysts say. But some borrowers will have trouble meeting the higher payments and may be forced to sell their homes or could lose their homes to foreclosures. A recent study by First American Real Estate Solutions, a unit of title insurer First American Corp., projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans. via RealEstateJournal

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