Wachovia helps customers bail on option ARMs

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Wachovia is not just the latest lender to stop offering option ARMS.

It has decided to help homeowners who have one of these dangerous, foreclosure-prone loans get out, too.

The bank is waiving all prepayment penalties for borrowers who want to sell or refinance into more traditional mortgages.

That will be the biggest help to California homeowners, who hold nearly 60% of the bank's Pick-A-Pay loans.

Option ARMs were extremely popular in hot housing markets when prices were going up so fast, most potential buyers couldn't afford homes using traditional loans.

Option ARMs like Wachovia's allowed borrowers to choose from four monthly payments, including a so-called minimum payment that doesn't even cover the total monthly interest charge.

The difference between the interest charge and what borrowers pay is added to their principal. So homeowners literally fall further into debt with every check they write.

Borrowers who want to sell or refinance during the first two or three years of the loan are often thwarted by prepayment penalties -- five or six months' interest, or a flat fee of $5,000 to $10,000.

By waiving the prepayment penalty on its Pick-A-Pay loans, Wachovia is removing that hurdle.

If you have an option ARM from any lender and have only made the minimum payments for the past several years, you're headed for trouble.

You could be about to reach your debt cap, which will force you to begin paying all of the interest and repaying the principal. Your payments could literally double from one month to the next.

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