Avoiding mortgage-reset headaches

NEW YORK (CNNMoney.com) -- Today Treasury Secretary Henry Paulson outlined some steps the federal government, lenders and investors would try to do in order to save struggling homeowners.

For homeowners who are struggling with their mortgages, industry reps will contact borrowers 120 days before their mortgage resets to help them navigate problems - and letters are being sent to those who can't be contacted by phone.

There may also be more mortgage products available to homeowners struggling with higher rates. Those people may be given loan modifications and refinancing options to help them afford their mortgage.

There was talk of involving state and local authorities to find ways to help people stay in their homes. However, the treasury secretary stopped short of calling for an interest rate freeze for borrowers with resetting arms. This is an idea that has been widely discussed.

The government acknowledges the downturn in the housing market may have profound effects on the economy. In fact there are about 2.3 million subprime borrowers whose home loans are projected to reset at higher rates through the end of next year.

That means those low teaser rates may go up a few points, resulting in monthly payments that could be hundreds of dollars more. And it's estimated that $890 billion of subprime U-S mortgages will have their rates reset next year, with the peak expected in March, according to a report by the Organization for Economic Co-operation and Development.

If you have a traditional ARM, or 1-, 3-, or 5-year hybrid ARM, your monthly statement will not tell you your caps or any other terms of your loan. To find out when your rate could adjust and what you'll be on the hook for, dig out your adjustable rate rider. This should be included with your original closing papers. Some rates adjust monthly, while others adjust every year.

Next, you'll want to look at the caps. These caps prohibit your interest rates from moving too much in either direction in a given time frame. Your first reset is usually the biggest jump. Most adjustable rate mortgages have a cap on how much the rate can go up during the loan's lifetime. That lifetime cap can be five or six percentage points above the original rate.

If you have any questions, or you're not sure what you'll have to pay, call a non-profit counseling organization. To find one in your area, go to www.HUD.gov.

Sometimes refinancing just isn't in the cards, especially if home prices have dropped significantly in your area. If values haven't dropped that significantly and you can't make the higher payments when your rate resets, you should think about refinancing if you plan to stay in your home for at least another two years and you'll lower your interest rate by at least 1.5 to 2 percentage points by refinancing.

Rates on a 30-year fixed mortgage are still at low levels. In order to refinance you'll need 10 to 20 percent equity in your home. If you're thinking about trying to refinance, it's more important now than ever to clean up your credit. If you've missed payments or run up huge credit card bills, it may not be worth your while to refinance since you may not get the best rate.