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Sub Prime Loans: What's The Problem?

Apr 8, 2008
If you have read a newspaper, been on the internet, or tuned into your local news you have undoubtedly heard about the sub prime loan problems that are occurring all over the United States. It is hard to go anywhere or do anything without hearing about it, but do you know what the problem is?

Many know that there is a problem right now with millions of people who have this type of loan but they are still considering one for themselves.

You deserve to know what the issue is before you go this route. Don't you want to know what is causing millions of people to lose their homes?

Where Did They Go Wrong?

To understand the problem you must first understand who has these loans and what they are all about. In the past five years many lenders have been targeting those that have low credit scores, generally below 620 or so.

The lenders would appeal to these people by getting them into homes that they would not afford otherwise. The way they were able to do this was by offering deals to get into homes with little or nothing out of pocket.

In addition to this, those that took advantage of these offers were offered interest rates that were below market, as low as 3%.

This sounds great at first glance because a homeowner who has less than perfect credit could buy a home for virtually nothing and then they had affordable monthly payments. The problem comes a couple years after the purchase of the house when everything is going along just fine.

The interest rate adjusts from the 3% to the current market, which means that it goes up sometimes by as much as 5 to 10%. Doesn't sound bad, does it?

Well, this increase can mean an increase of hundreds of dollars per month and suddenly the homeowner finds that they are not able to make their house payments anymore.

There are an estimated 2.1 million sub prime loans right now that are delinquent, which means that all of them, or more than 13% of those that have these loans are looking at losing their homes.

This is serious and unfortunately none of them were able to think past the first couple years when they had teaser rates. This was the idea behind the whole program, to get people into homes and blind them with great rates.

Unfortunately, no one realized how many of them would truly be unable to pay on their loans, but when you stop and think about it, it all makes sense. Such loans were given to those who have a history of not being able to pay bills so why should their mortgage be any different.

Before you choose to go with one of the mortgage programs you really need to stop and think about whether you could afford hundreds of dollars more per month when your loan adjusts.

You don't want to end up like the millions of people out there now, who were blinded by great introductory rates. It makes more sense to choose something that you can afford now and will still be able to afford in two years.
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