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Say you wanted to buy a $1 million home in San Francisco but couldn't really afford it.
No problem, a few years ago some banks like WaMu and Wachovia offered you an option arm -- meaning you chose how much to pay each month. It was called pick-a-pay mortgage and whatever amount you couldn't pay was then added to your balance.
"So people would take the cheapest option up front and figure they would make the money in the back end and be all set. Now that they can't sell their home, they are facing these resets and they can be in real trouble," said Marketwatch editor-in-chief David Callaway.
They could be in trouble, because if your loan is resetting, you now have a higher balance which will mean higher payments.
According to First American Core Logic, 10 percent of all mortgages in the U.S. are beginning to adjust and will continue to do so in next few years. These loans are worth about $1 trillion.
While this is happening, the big concern is unemployment.
"If it continues to go up these are hundreds of thousands of people per period losing their jobs and that means a lot of homes lost as well," said Jon Fisher from USF School of Business.
Another thing to worry about is inflation which would force the Federal Reserve to increase interest rates -- making it harder to refinance.
"Thousands of more people kicked out of their homes is going to drag down the economy again because there will be less consumer spending. These people will be looking to find new places to live, not going out to dinner, not going out to shows or sporting events and circulating money in the economy," said Callaway.
Interest rates are still low. Some experts believe a 30-year fixed-rate mortgage may be a better choice.
Dick Lapre is a loan officer and his advice is to always try to negotiate with your lender.
"If you can't really afford the payment but you show a history of making the payment it's in the mutual interest of the borrower and the bank to renegotiate say the interest rate down to something the person can afford," he said.
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