Today we hear a lot on the news about the crisis subprime mortgage lenders are facing. Why is this such a crisis? To answer this, you need to understand what a subprime mortgage is.
Valerie RumboughOver the last few years, many people with low credit scores have been able to purchase homes through lenders who offer low “teaser” payments in order to help individuals realize “the American dream” of home ownership. These types of loans have contributed to the housing boom that has occurred across the country.
However, this “dream” can quickly become a nightmare. The lender may determine that the borrower “qualifies” for a house that is much more expensive than they can realistically afford. To help them “get into the house,” the first few payments made are low.
However, because the interest rate is much higher for this type of loan, the repayment schedule is on a graduating scale. The increasing payments quickly become more than the homeowner can afford. In addition, the mortgage may contain a balloon payment and/or a prepayment penalty. A balloon payment is when the entire mortgage balance is due after a period of time, usually in five years. If the borrower can’t pay the balance, he/she is forced to either refinance or sell the home. A prepayment penalty is a fee assessed against the borrower either because the borrower sells the house or refinances the high-rate loan.
These factors contribute to the high rate of foreclosures. As the number of foreclosures increases, so does the number of subprime lenders that go out of business. Since this is such a large industry, it affects the U.S. economy, and, as we have seen lately, it also affects the stock market in general.
For those who have been caught up in this type of loan, it is a sad situation. Therefore, it is important for those who are contemplating a house purchase to carefully weigh the situation to determine how much house they really can afford. If your credit is less than perfect, perhaps a house purchase should be delayed until you can improve it to the point of qualifying for a more reasonable interest rate and mortgage terms. Seek godly counsel from a Christian financial planner, who can help you develop a house purchase plan that is right for you and honors God.
Editor’s note: In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purposes.