The Good and Bad of Sub Prime Mortgages
Buyer beware applies to the lending market as much as anywhere else. Today’s market is seeing a battering with high defaults on loans, rising debt and bankruptcy which snowballs right throughout our communities. And with this comes the sub prime mortgage crisis.
So many first home buyers and lower income Americans finally realized the dream of living in their own home. After years of rejection and the worry of not being able to afford a place to call ‘home’, sub prime mortgages were an answer to their prayers.
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The sub prime mortgage was created to meet the borrowing needs of people starting out and those with lower credit ratings. But the dream has become a nightmare. A combination of rising interest rates and a down turn in the real estate market has left them facing bankruptcy and the loss of their homes.
In 2005, one in five Americans held sub prime mortgages. Today there is a much higher default on these mortgages compared to conventional mortgages.
What are Sub Prime Mortgages?
What is a sub prime mortgage you ask? Traditionally a bank’s lending power was limited to what their customers deposited. A sub prime mortgage was created to lend money to people with poor credit ratings and limited proof of income. Mostly these loans are bought from lenders by institutions in the private sector seeking to make high profit returns. If your credit rating is too low to qualify for a conventional mortgage, you may be offered a sub prime mortgage loan. So, it pays to look after your credit rating which can drop by simply paying your power bill or car payment late. If you thought making payments late didn’t matter then think again. If you are habitually late, conventional lenders will look at you unfavorably. A poor credit rating can and will affect your ability to make choices in other financial areas of your life.
What is the Difference?
Interest rates are higher for a sub prime mortgage than prime rates with a conventional lender. Many factors influence what the sub prime mortgage rate is set at, such as:
-Â Â Â The size of your down payment
-Â Â Â Credit rating
-Â Â Â Your history of defaults and late payments
Introductory interest rates are set low as teasers to attract customers to the sub prime mortgage, and are fixed for the first 2 or 3 years then become a variable rate. Many people are lulled into a false sense of security by this and are unprepared for the huge cost of their mortgage payments when the rate changes.
What Loan should You Choose?
There is no easy answer to this. Think about how you will maintain mortgage payments when interest rates rise. What happens if you can not work? How much can you afford? But, most importantly, do:
-Â Â Â Get advice from a financial adviser and your accountant.
-Â Â Â Get expert advice from a non biased broker (sub prime mortgage brokers will want to sell their product).
-Â Â Â Assess your capacity to repay the mortgage over the next 5 years.
-Â Â Â Look at the impact the interest rates will have on monthly repayments.
-Â Â Â Be realistic about what you can afford.
Don’t be in a hurry when looking for a mortgage and don’t just accept the first one you are offered. Make sure it is right for you. That you can afford the interest rates.
Sub prime mortgages are good if you just want to use the low interest period and then refinance. But check your contract as a lot of these loans have balloon or early payout fees. Consider if you are eligible for a conventional loan; if not, then maybe you are not ready to buy a home. Do your homework and choose wisely. Here’s a place that will help you get started, it offers personal loans and credit cards for the credit impaired. You may have been turned away elsewhere, but everyone is welcome at Abacus and is worth checking if that service is what you’re looking for.
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