Mortgage lenders use to evaluate a borrower’s ability to repay a mortgage as a major consideration in the pre-qualifying process. Now with the advent of specialty financing anyone can initially qualify for a mortgage. Whether the borrower can afford the mortgage payment in the long term is not a concern. These “subprime” or “non-prime loans” are marketed to individuals with less than perfect credit or low incomes. These loans may start with a very low interest rate and monthly payment but over time they charge abnormally high interest rates and fees.
The Center for Responsible Lending issued a study today stating that one in five subprime mortgages entered into over the last two years will likely go into foreclosure. That translates into approximately 1.1 million owners losing their homes.
The complete study can be found online at http://www.responsiblelending.org/
Subprime mortgages were almost unheard of five years ago. Today they are one of the most profitable sectors of the mortgage business. Banks and mortgage companies began aggressively marketing these loans after finding that their higher interest rates and fees made them very profitable. A quarter of all mortgages made in the U.S. are now subprime.
Many of these are adjustable rate mortgages (ARM) that start at very low interest rates with interest-only payments. After this initial period, interest rates adjust up steeply to built-in rates with escalating monthly payments. These loans frequently have larger than normal prepayment penalties, limited documentation and no escrow accounts for property taxes and insurance. In other words, these loans are a recipe for disaster for most low income families.
The alarming default rate predicted by this study should be a wake up call to anyone considering an exotic mortgage. If you can't understand the terms of the mortgage or the initial terms seem to good to be true (with an interest rate well below the prime rate of 5.25%) - then think twice.
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