How to Escape Mortgage Disaster

2007 was a lousy year for homeowners, especially those who benefited from the once boisterous and now stumbling subprime mortgage market. The Center for Responsible Lending says that 2.2 million borrowers with subprime loans may face foreclosure in the next several years. If you foresee trouble making you mortgage payments next year, don't panic—there are options out there to help you stay afloat.

1. Explain the situation. If you're about to miss a payment, call your lender pronto. "Talk to someone in the loss-mitigation department," says Elizabeth Razzi, author of The Fearless Homeowner. This person can help you design a payment plan with options like breaking missed payments into installments (though you'll probably have to fork over a fee for this service).

2. Stretch out your mortgage. Ask your lender if you can extend your amortization schedule. Switching from a 30-year to a 40-year plan lowers your monthly payments. Some lenders might even roll your missed payments into your new mortgage loan.

3. Get a fixed rate. If you're facing rising interest costs on your adjustable-rate mortgage, see if you can switch to a fixed-rate loan. This will make your payments the same every month, allowing you to better plan for the future. Remember that lenders would rather refinance your home than foreclose on it, since the latter causes them to lose money.

4. Ask about a short refinance. They're not common, but ask your lender anyway: Some lenders will forgive a portion of your debt, then refinance what's left into a new, more affordable loan.

5. Sell. If your payments are looking truly insurmountable, there's no shame in selling. Some lenders will let you unload your house for less than the outstanding loan, then forgive the remaining debt.

6. Move on. If you're facing foreclosure, remember that it's not the end of the world. "There is life after foreclosure," says Razzi. "Just find a place to rent that fits your budget. If you take the time to rebuild your credit, you can start over."

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