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If you have a 30-year fixed-rate loan at current mortgage interest rates or less, no action may be necessary if you have enough cash and liquid assets to cover one year's worth of living expenses. If not, refinancing your mortgage to reduce payments or prevent future payment increases may be a good idea if you have equity in your home.

If you have sufficient equity and your credit score is sufficient, you may be able to take out cash in the process, which is a particularly good idea if you have little savings and/or you can significantly lower your mortgage interest rate through refinancing. If liquidity is a challenge and you're eligible for a home equity line of credit, apply now so it will be in place in case of a crisis. Things are trickier for homeowners with mortgages that are "underwater" (the mortgage balance exceeds the home's current market value). Most lenders won't forgive the difference unless you're behind on payments and are out of money, and even then they are far more inclined to a restructuring that would temporarily reduce payments to an affordable amount while maintaining the mortgage balance.

A new "Hope for Homeowners" FHA program may enable some homeowners to get part of the mortgage debt forgiven and refinance with a 30-year fixed-rate mortgage. Yet other alternatives may emerge out of the current Wall Street rescue effort over the next few months. In most cases, a foreclosure should be avoided if possible.

In some cases, it may actually be in the homeowner's best interest. For example, some financially-pressed homeowners whose mortgage balance far exceeds their home's value have recognized that it will probably take many years for the home's market value to catch up with their mortgage balance. In the meantime, they are also trapped in their present home and unable to sell and take advantage of better job opportunities in other areas. By the time home values do catch up, many could have restored the damage done to their credit rating by a foreclosure, and they would have advanced in their career as well.

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