Adjustable rate mortgages will be responsible for a new wave of foreclosures over the next 2-3 years. As a majority of the loans that were given to home owners were risky, toxic loans that came with low teaser rates, which are now expiring and as a result home owners, will see their payments sky rocket. This will become overwhelming for a lot of home owners who are already dealing with a job loss or reduced hours at work as the economy declines.

The worst type of adjustable rate mortgage is known as the option ARM, also known as pick-a-payment loan, which gave home owners several payment options per month. They could choose to make a minimum payment similar to a credit card, an interest only payment or a fully amortized principle and interest payment.

Majority of the borrowers that got these types of loans chose to pay the minimum which was normally at a 1 % interest rate, without fully understanding the consequences of doing so, and saw their balance each month increase with this payment option. Some weren't too concerned as when they got the loan, real estate values were increasing on what may have seem like a daily basis, but got a rude awakening when the real estate bubble burst. So now they are dealing with a home that is worth less than their mortgage amount and now their payment is about to reset which will mean they will see some major payment shock as they have to now make a full principle and interest payment.

And to make matters worst, refinancing will no longer be an option for these home owners, even if they have good credit as they will have no equity in their property to do so. And even if they could qualify for a refinance most home owners would still see an increase in payment especially if they were only making the minimum 1% rate payment.

According to Fitch Ratings, about $134 billion in option ARMs will reset in the next 2 years and home owners will see their monthly mortgage payment increase by 63 %. The home owners that will experience the worst of the mortgage epidemic are the ones that reside in Florida, Arizona, California and Nevada. These states are considered ground zero for foreclosures and are seeing the largest declines in property values fueled by the high foreclosure rate.

Some of the major lenders are starting be proactive with these types of loans on their books and are reaching out to home owners early to see if they can limit their losses by refinancing, short sales and or loan modifications which would include not just rate reductions, but extension for terms from a 30 year loan to a 40 year loan and in some cases principle reductions to make the payments more affordable.

Home owners that have any type of adjustable or exotic mortgage loan need to take action early and not wait on their lender to bail them out. Some home owners will be best suited with a short sale and to start over, while other may qualify for a loan modification that can give them more affordable payment.