Adjustable-rate mortgage (ARM): A mortgage that starts out with one interest rate for a period of time and then “resets” to a new interest rate.
(What you should know: The starting interest rate is often enticingly low. The new interest rate will be higher — and your monthly loan payments will get bigger. That’s called payment shock.)

2-28 ARM: An adjustable-rate mortgage that has a fixed interest rate for two years. Then, the interest rate begins to float, based on an index, plus a margin. Typically, these adjustments increase interest rates every six months, which is why they are often referred to as “Exploding ARMs.” What you should know: 2-28 ARMs fall into the category of “creative financing” mortgages that were typically aimed at people with poor credit ratings. The idea was that in two years, these borrowers could fix their poor credit ratings and then refinance to fixed-rate loans. Often, the new variable interest rates drive monthly payments higher than borrowers can afford.

Balloon or reset mortgage: The total of monthly payments does not cover the entire loan balance. At the end of a balloon loan — usually three to seven years — the homeowner must either pay off the balance in a lump sum or refinance the loan. What you should know: Think of these as temporary loans. After three or seven years, you need to come up with the balance. Balloon loans have higher foreclosure rates than traditional mortgages because borrowers often can’t afford to pay off balances when they come due - and may be unable to find refinancing.

Conventional mortgage: The interest rate is locked in — and your monthly payments remain the same — for the term of the loan. Also called a fixed-rate mortgage.

Deed in lieu of foreclosure: If you can’t afford the mortgage payments and are unable to sell your home, a lender may accept ownership of your property in place of the money you owe. This is referred to as “walking away.”

Default: When a borrower has missed payments, the loan is in “default.” What you should know: The sooner a borrower takes steps to find a remedy, the more options there are.

Equity: The value of your home, minus what you owe on it. If you owe $80,000 on a house you mortgaged for $100,000, your equity is $20,000. What you should know: If property values decline, your equity will also decline. For example, if that $100,000 home drops in value to $90,000, you still owe the $80,000 you borrowed, but your equity is now only $10,000. When your house falls in value below what you owe on it, it’s called negative equity. On the bright side, if your home rises in value, so does your equity.

Fixed-rate mortgage: The interest rate is locked in — and your monthly payments remain the same — for the term of the loan. Also called a conventional mortgage.

Forbearance: A lender agrees to let a borrower postpone payments or pay a lower payment for a temporary period to give the borrower time to catch up on late or missed payments. What you should know: This remedy is more likely to be available to borrowers who seek help early, before they fall several payments behind.

Foreclosure: When a homeowner is unable to make the payments on a mortgage, the lender can legally seize and sell the property as stipulated in the mortgage contract. What you should know: Foreclosure is a worst-case scenario that will damage your credit and prolong your efforts to get back on your feet.

Foreclosure Rescue Scam: Be wary of anyone who guarantees that they can save your home from foreclosure for a fee.  Only an agreement between you and the lender will save your home.  However this agreement can be facilitated by a counselor from a HUD approved housing counseling agency.  No fees are charged for these services. Go to the HUD website for more information.

Interest-only loans: Loan payments, due at intervals, go only toward the interest on a loan. When the loan is up, usually five to seven years, the full principal is due. What you should know: This is a “creative financing” mortgage. Interest-only loans might work for people who are paid big bonuses once or twice a year — or, borrowers who expect a big inheritance. For most people, they are risky business.

Loan modification: A lender agrees to change the terms of a loan when a borrower has the means to make monthly payments but is not able to meet the current terms of the loan, often due to “resetting” interest rates. Modifications typically lower the interest rate of a loan, extend the length of the loan or switch the borrower to a different type of loan. What you should know: Act quickly; good lenders may be willing to work something out because foreclosures are costly to them, as well.

Loss-mitigation department: When contacting your lender, ask for this department. This is where you’ll find the people who can help you find a temporary remedy to your problem or work out a loan modification. What you should know: The collections department and the loss-mitigation department have different missions, so be sure you know to whom you are talking. Also, when working out a temporary solution or modification, get it in writing.

Making Home Affordable: Making Home Affordable is part of President Obama’s comprehensive strategy to get the housing market back on track. Through the Making Home Affordable Program, up to 9 million American families may be eligible to refinance or modify their loans to a payment that is affordable now and into the future. Call a housing counselor and your servicer immediately if you are in default or in imminent danger of default to see if you qualify for the program. More information is available at makinghomeaffordable.gov.

Mortgage broker: Brokers are not lenders; they find mortgage loans for borrowers. Brokers are compensated directly by borrowers — usually a percentage of the total loan, plus other fees. They have no legal obligation to work in the best interests of borrowers. Sometimes, brokers are paid a commission by lenders based on the profitability of the loan, which again works against the interests of the borrower. What you should know: The majority of sub-prime loans were originated by mortgage brokers.

Predatory lending: Loans that victimize borrowers with excessive or hidden fees, high-interest rates, steep prepayment penalties and other terms that trap borrowers in debt. What you should know: If it sounds too good to be true, it probably is. Get a second opinion — or consult an attorney — before signing on the bottom line.

Prepayment penalty: A fee a lender charges if the borrower pays off the loan before the agreed upon end of the loan. In other words: If you pay off a 20-year loan in 10 years, you must pay whatever you still owe on the loan (the principal), plus a fee that is specified in the loan contract. Steep prepayment penalties are common in sub-prime mortgages with high interest rates because borrowers try to pay these loans off as early as possible.

Repayment Plan: An Agreement to pay the overdue payments over a period of time by adding an extra amount to your monthly payment.
Reset: See balloon mortgages and adjustable rate mortgages.

Short sale: When the sale of your home brings less than the outstanding loan, lenders may agree to forgive the difference. What you should know: This may be a way to avoid foreclosure and protect your credit rating. Unfortunately, you still lose your home. It is very important when doing a short sale to have an attorney make sure that you will not have a deficiency judgment in which you would have to pay the difference between what you owe and what the lenders receives.

Sub-prime mortgages: The word “sub-prime” is applied to a wide range of mortgages that have a common characteristic: risk.  In general, sub-prime mortgages are aimed at borrowers with less-than-perfect credit histories and may offer “creative” financing approaches: adjustable rates, balloons, interest-only, no down payments, little documentation. Here’s the confusion: The word sub-prime does not refer to the interest rate of the loan, but to the borrower’s credit quality. In fact, the interest rates on these loans are almost always higher than the overall market rates.

Trial Modification: Generally used for the Making Home Affordable Modification Plan in which the homeowner agrees to make three months of a modified payment before it is modified on a permanent basis.  There is no grace period for these payments.

For your first appointment, have the necessary documents ready - if you are prepared you can avoid delays.

Take with you:

• A photo ID
• Your most recent lender correspondence. Include your payment statement/history, the balance owed and the amount of delinquency, current mortgage payment, and if you have a written copy of any payment or workout plan already in place with the lender.
• Current utility bills (water, gas, electric)
• A list of all other monthly bills/expenses
• Proof of your most recent tax bill
• Proof of insurance on property include current policy date, amount of coverage and annual premium
• Proof of income (60 days) For Example: Your most recent pay stubs (a couple consecutive ones), W-2 forms (2008 and 2007), 2008 Social Security Income Letter, or 2008 Retirement Income Letter
• Your most recent bank statement (60 days) from a checking or savings account
• A recent statement (60 days) from your 401-k, CD’s, IRA’s or other investment annuities
• Your 2008 tax return
• If you are self employed –complete tax returns with all schedules for three years, a 1099 income statement and year to date profit and loss statement
• Foreclosure filings if applicable
• Your original closing documentation (if possible)

Facing the Mortgage Crisis Document List provided in cooperation with United Way of Greater Cleveland 211 First Call for Help, Cleveland State University, Cuyahoga County Public Library, Empowering & Strengthening Ohio’s People, Federal Reserve Bank of Cleveland, Foreclosure Prevention Program, Case Western Reserve University, Neighborhood Progress, Policy Matters Ohio, Cleveland Housing Network, Akron Urban League

Facing the Mortgage Crisis is part of CPB’s Public Service Media Economic Response Initiative.

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The American dream of home ownership is disappearing during these times of crisis. In Ohio, rising unemployment, loss of business, and a bleak economic outlook also threaten that dream.

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