Rising interest rates have given many homeowners a nasty surprise on their mortgages over the past year. Yet while some have taken the opportunity to refinance to fixed-rate mortgages, the most vulnerable borrowers continue to rely on riskier financing that could cause even more problems.

Earlier this month, the Mortgage Bankers Association came out with two reports on the health of America's borrowers. One survey focused on the mortgage loan market overall, while the other took a closer look at lending to subprime borrowers. For those who are already a bit jittery about the implications of the subprime crisis, the contrast between the two reports can only add to their concerns.

Retreating to safer ground
The general survey showed that more borrowers are moving away from risky adjustable-rate mortgages (ARMs) toward fixed mortgages. Three out of every five mortgages during the second half of last year had fixed rates, compared to just more than half in the first six months of 2006. Apparently, many borrowers have learned their lesson about the payment shock that comes when higher rates kick in on their ARMs.

With the recent spike in interest rates, those who refinanced to fixed mortgages late last year couldn't have had better timing. Rates on fixed mortgages have risen half a percent or more in recent months, which could have stretched those with already strained budgets beyond the point where they could afford a fixed loan. And as the Federal Reserve has consistently disappointed those looking for interest rate cuts, there's no guarantee that rates won't keep rising.

Subprime woes continue
For subprime borrowers, on the other hand, the story is much different. Far from embracing fixed-rate mortgages, less creditworthy borrowers seem to be doubling down, in hopes that a combination of recovering home prices and more favorable rates will bail them out. Three-quarters of all subprime loans originated in the last half of 2006 were ARMs, up from two-thirds in the first part of the year. Even as rates have risen, many subprime borrowers continue to use their homes as a source of cash for other uses; 87% of all refinancing loans were for the purpose of taking out additional cash.

It's disheartening to see subprime borrowers failing to learn from their past mistakes. Yet as the housing market continues to sputter in many areas of the country, homeowners who were forced to take huge risks with their finances in order to afford their homes may be getting increasingly desperate to try to maintain their standard of living.

Moreover, it's clear that subprime borrowers continued to find sources of funds for new loans in late 2006. Yet those sources may now be drying up. General Electric (NYSE:GE) today added itself to the list of lenders cutting back or eliminating their subprime lending businesses, in the wake of a Moody's (NYSE:MCO) downgrade of subprime mortgage securities that own mortgages it originated. Other lenders responsible for making these downgraded loans include Washington Mutual (NYSE:WM), Fremont General (NYSE:FMT), and now-bankrupt New Century Financial. As losses loom, big lenders may decide the potential profits from subprime just aren't worth the risk. And as default rates rise, those lenders who remain willing to make these loans will offer even less favorable terms -- yet with little power to negotiate, many borrowers will have little choice but to take whatever money they can get.

Calling it a day
Unfortunately, many homeowners never consider that they may not really be able to afford the home they own. As painful as it is to give up your home, it's not worth risking financial ruin to stay in a home you can't pay for. It's one thing if you're going through just a temporary setback, but many families have little chance of coming up with the money they need to make payments -- sums that may only increase further if rates continue to rise.

Before you give up on your dream of owning your home, however, you should consider all your options. A look through the Fool's Home Center can give you basic information about various ways to obtain or refinance a mortgage. If you think a makeover of your financial plan could uncover enough money to make ends meet, consult with our experts at Motley Fool Green Light, our personal finance service. The service goes beyond the basics to tell you exactly how to resolve your money problems and get back on the path toward financial independence -- and it's absolutely free with a 30-day trial.

Whatever you decide, it's better to know exactly what you face than to stay in denial, letting your bill pile grow larger and larger. Taking action is the best way to solve problems and keep things from going from bad to worse.

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Fool contributor Dan Caplinger is holding his own with a fixed-rate mortgage. He doesn't own shares of the companies mentioned in this article. Moody's is a Stock Advisor recommendation. Washington Mutual is an Income Investor selection. The Fool's disclosure policy is fixed in stone.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.