Subprime Mortgage Rates Effect On Economy

August 30, 2011 – 11:16 am

A subprime mortgage is a loan given to individuals who have bad credit or do not qualify for a traditional mortgage. A person qualifying for this type of loan is responsible for paying a higher interest rate. This is because these individuals are often a greater financial risk for banks.

Many times, for the first few years individuals were only responsible for paying the interest on these loans. After this time expires the interest and principal are combined, creating a higher monthly payment. Often individuals had hoped to be able to refinance before the principal and interest were combined. If refinancing is not an option than often individuals and families are not able to offer payment to the bank. This can lead to bank repossession of the property, which decreases the value.

Once financial institutions realized that there was a demand for loans from those with poor credit they devised a way to loan money to risky clients in an attempt to earn more capital. In some cases banks began offering loans below the prime rate to individuals who would have otherwise qualified for a traditional loan.

In 2001 investment organizations began investing their money into mortgages for individuals who could not easily gain approval. Before this time, owning a home was reserved for those with a secure, high paying job, a good credit history and enough collateral to be able to cover any losses should an individual not be able to make a payment.

When banks began to decrease standards for achieving a loan suddenly individuals with poor credit, a shaky employment history and no collateral qualified for home ownership. Initially this was a profitable business opportunity for financial institutions, and gave many individuals and families a chance to achieve the dream of owning a home.

Many hopeful individuals invested in these loans with the dream that the value of their property would increase and they would be able to refinance. This would leave them extra money to pay off other debts. However, in 2006 the real estate market began to plummet as high interest rates depreciated the value of a home. The result was that individuals were not able to refinance or keep up with the increased monthly payment, causing banks to foreclose on many properties.

When banks began to foreclose on properties it left many homes unoccupied. Additionally, the lenders who invested in subprime loans were facing bankruptcy as all of their money went into hedge funds, which eventually became worthless. This, along with other economic downturns, contributed to the recession.

Subprime mortgage rates were designed to help individuals with poor credit have the opportunity to own a home. When individuals were not able to repay the loans their properties were often foreclosed on. Individuals wishing to pursue this type of loan should be aware that after a few years of paying interest only on the loan they will eventually be accountable to pay a combined interest and principal. These types of loans are not often utilized anymore as they have not been able to produce a financial gain for businesses or individuals.

More coverage can be found on the subprime mortgage and more by visiting the link. Additional housing related issues like the mortgage prepayment penalty are also reviewed.

from ezine articles.

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