What are Subprime Mortgages?

What new homebuyers should know about how the subprime mortgage crisis will affect them.

As you probably know, much of the current chaos of the U.S. housing market is stemming from subprime mortgages. For the novice, you may be wondering just what are subprime mortgages? Subprime mortgages are home mortgages that are offered to buyers at a much higher interest rate than the standard or “prime” rate. This type of mortgage is usually offered to buyers who have lower incomes and a lower credit score. The bank charges them a higher interest rate because they are considered a higher risk for default.

So what are subprime mortgages doing to the economy? When borrowers have a harder time repaying their loans, they are often forced into foreclosure. When a home goes into foreclosure, essentially the bank repossesses the home, and tries to sell it to a new buyer usually for the original loan amount, but often for less. This results in banks losing billions of dollars per year due to foreclosed homes.

At the same time, the lending industry is changing, making the guidelines for new home buyers much stricter, so it’s more difficult for people to find affordable housing. This pushes rent costs up, and home ownership down, making the economy more volatile. New homeowners may find it more difficult to obtain a loan than ever, while at the same time, rental prices go up.

Being armed with knowledge is the first step in making sound financial decisions. Knowing how to qualify for a traditional mortgage and not being put into a financial bind is the best way to protect yourself from becoming a victim. Take steps to boost your credit rating, save as much as possible for a down payment, and buy wisely. Choose a home that will hold its value even in a volatile economy.