Have you approached your lender for a loan modification?
Read my blog post at
//www.city-data.com/blogs/blog3...tgage-get.html about a client in the SF Bay Area who had a 5/1 I/O ARM with BofA who was able to get their loan modified without having to miss a payment and no damage to his credit.
Your interest may not go up like you think it is.
On an ARM, when the rate is going to adjust, there are a few things that it is based on. First thing you want to do before reading this is go into the loan docs you signed/received a copy of at closing, in those docs are some papers called the "Note" or "Adjustable Rate Note" or "Adjustable Rate Rider", sometimes you'll get just an Adjustable Rate Note, or sometimes it'll be a Note with the two addendums, it varies slightly with each lender and each state.
Once you have that info you'll want to look for some items. The first is the "Index" that your rate is based on when it starts to adjust. Common indexes are the the LIBOR and treasury/CMT. There are 1 month, 3 month, 6 month, and 1-year averages of these indexes that are released each month (1 month LIBOR is the average LIBOR rate for the past 30 days, the 6 month LIBOR is a 6 month average of the LIBOR index, etc.). Odds are your index will either be a 6-month or 1-year average of an index, if it's a sub-prime program then it's likely tied to the 6-month LIBOR. OK, now that you've found your index in your docs, you'll now want to look for the "Margin". The margin is what is added to the index to determine your "Fully Indexed" interest rate when your rate adjusts. The margin is a fixed number, whereas the index number changes constantly. So as an example, let's say your rate is about to adjust, based on the 6 month LIBOR, and let's say the 6 month LIBOR is at 2.17% (because it is right now), and let's say your margin is 5%... when your rate adjusts, your fully indexed rate will be the fully indexed rate (2.17%) + the margin (5%) = 7.17%. Lenders usually round up to the nearest 1/8th of a percent, so figure it'd be rounded up to 7.25%.
The next thing to look for are the "Rate Caps", which can also be found in the documents you have. The rate cap is the maximum amount your interest rate can change on any given rate adjustment. There are three different caps - the initial cap, the subsequent cap, and the lifetime cap. The initial cap is the maximum amount the interest rate can increase over the rate you had for the fixed period. So while you are at 6.975%, and if your initial cap is 5%, the maximum it can increase to would be 11.975%... even if the index + margin equals over 11.975%. The next cap is the subsequent cap, meaning you also have a cap on any other time the rate will adjust either. That cap is usually lower, such as 2%. So let's say you went from 6.975% to 7.25% on your 1st adjustment, and then on the 2nd adjustment, the index + margin would equal 10%, but since your subsequent cap is 2%, the most your interest rate can adjust to would be 9.25% (7.25% + 2%). The final cap is the lifetime cap, and this is the maximum your interest rate can increase over the rate you had for the fixed period, and is often the same as the initial cap. So if the lifetime cap is 5%, and your initial fixed rate was 6.975%, then your interest rate may never exceed 11.975% for the entire term of the loan.
When you go to apply for a new ARM you can get all of this information upfront - index, margin + caps. The caps are usually in a X/X/X format, where the first X is the initial cap, 2nd X is the subsequent cap, and the 3rd X is the lifetime cap - such as 5/2/5, 2/1/5, etc.
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