If you are a homeowner that purchased your home with an Option Adjustable Rate Mortgage, you might be feeling the waters rising when it comes to your monthly payments. If you have one of these risky “payment plan” mortgages and have only paid the minimum payment amount, you could be in trouble and don’t even know it. Here are several tips to help you stay afloat with your option ARM and avoid losing your home to foreclosure.

Option Adjustable Rate Mortgages or so called “payment plan” loans are especially troublesome for many homeowners. These loans allow the borrower to choose their payment amount each month from four options, the lowest being a minimum payment amount that does not cover all the interest due that month. The unpaid interest is added on to your loan balance which results in a phenomenon called “negative amortization.” Negative amortization means that your loan is actually growing over time instead of being paid down the way a mortgage is supposed to be paid. When your growing loan balance reaches 125% of what you originally borrowed, the mortgage blows up in your face and the payments skyrocket.

The popularity of these risky loans has soared over the past several years, partly because homeowners don’t understand what they are getting themselves into when borrowing with an option ARM. According to a recent survey of national mortgage lenders over 12% of all mortgages taken out this year are option loans. This is up from .05% of loans in 2003. According to the same survey nearly 80% of homeowners with option ARM loans only make the minimum payment each month; 1 in 5 of these homeowners making the minimum payment will lose their homes at foreclosure.

Refinance Now If You Can

These risky option ARM loans are popular because it’s very easy to qualify for these loans. If you are a homeowner with poor credit refinancing might not be an option; however; if you are able to refinance you should get out of this loan immediately. Choosing a mortgage with a fixed interest rate will give you predictable mortgage payments that you can plan your budget around. You will begin paying down the balance the way a mortgage was intended.

If Refinancing is Not Possible

If refinancing is not an option for you, there are steps you can take to protect your home. The first thing you should do is stop making the minimum payment. Carefully review your loan contract to find out when your mortgage will be re-cast, resulting in a higher payment amount. Option arms come with adjustable interest rates; once the option period ends the mortgage lender will adjust your loan’s interest rate at regular intervals which could raise your payment amount.

If you know trouble is coming with your payments, call your lender before you fall behind. If you don’t know when the lender will re-cast your mortgage or when interest rate adjusts, call and ask. Never wait until you’re behind on the payments to ask for help. Mortgage lenders want to keep their loans out of foreclosure as much as you do and will work with you to keep the loan current. You can learn more about keeping your mortgage afloat by registering for a free mortgage guidebook.