Understanding Subprime Mortgages
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In the early twentieth century, most home buyers saved up enough money to purchase a home upfront and seldom used a mortgage. However, today most home buyers rely upon a mortgage to purchase a home, because they do not have enough money to buy the property upfront.
In the US, a financial crisis is currently occurring and many blame a large part of the current financial problems on subprime mortgages, although in truth they are only one of the many problems with our financial market.
What is a Mortgage?
A mortgage is a type of loan that is offered to people who wish to purchase a home. The home or land is used as collateral to secure the loan, with the lender taking ownership of the property should borrower default on their loan. There are many types of mortgages, such as conventional mortgages or Adjustable Rate mortgages, available to the borrower.
What is a Subprime Mortgage?
A subprime mortgage is a mortgage that is offered at a higher rate than other mortgages. Subprime mortgages are often used by those who have less than perfect credit and often not only have a higher interest rate, but also higher fees than other mortgages.
How Subprime Mortgages Contributed to the Financial Crisis
Subprime mortgages became very popular over the last few years, as home values quickly increased. With the increase in home values, many who wanted to purchase a home were unable to get traditional mortgages due to problems with their credit that made them unattractive to lenders.
Instead of simply turning away these individuals with poor credit, lenders decided to create a special mortgage for them that had a much higher interest rate than other mortgages. These lenders were gambling on the fact that home values would continue to rise, so even if the borrower defaulted, they would still make money. In 2001, it was reported that there were around $150 billion in Subprime Mortgages and by 2006 this figure had increased 400% to $600 Billion.
Today, while the credit market has contracted it is not impossible for someone with no credit or even poor credit to get a quality home mortgage, so there is no reasons to go with a subprime mortgage.
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That is a very big jump J-Mae, I am sorry to hear that
In some cases, I think the person getting the loan may not aware that they are getting a subprime loan. A recent study found that single women are responsible for an increasingly large number of home purchases, but they are also getting a disproportionate number of subprime mortgages. This is in part because for the first year or two, a subprime mortgage can look very attractive to a home buyer.
I think one of the problems is that many people use a Mortgage Broker to get a loan, without fully understanding how a mortgage broker works.
Using mortgage broker can be a great way to save money, because a mortgage broker has access to several lending institutions, so can often times find you the best deal available. However, the flip side to this is that mortgage brokers are only involved with getting the loan. As soon as the paperwork is done, they get their commission and are no longer involved with the person getting the mortgage. As a result, some less than reputable mortgage brokers might push a subprime mortgage on someone, because it offers them the greatest commission.
This is of course not to say that all mortgage brokers are like this. There are plenty of honest mortgage brokers out there. About 8 years ago, a friend of mine used one and saved big over what his bank was offering, but it is important to do your research first. However, I think in a lot of the cases where someone is offered a subprime mortgage without knowing it, a less than reputable mortgage broker could have been involved.
J-Mae 2 years ago
This would have been really informative for me five years ago. If I would have known this our interest rate would not have jump 2 1/2% in a day.
We filed the paper work and before approval the rate had jumped. We also found out then when you apply for a loan you should ask for the interest rate to be locked.
Do loan officers tell their clients that they are applying for a subprime mortage?