Subprime and Adjustable Mortgages

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Sometimes, when people buy a home for first time, they usually get subprime mortgage rates. Lenders grant these types of rates are to borrowers whom their credit history is not sufficient to get a typical mortgage. Sometimes, these borrowers have bad or even insufficient credit history. Subprime mortgages regularly offer loans that are interest only. These loans, that are “interest-only,” are easier for buyers to afford. When you get one of these loans, the lender does not require you to pay any of the principle for the first few years of the loan. Sometimes, borrowers think that they will refinance their loan before they have to pay the principal and the monthly payment start to increase. When they cannot refinance their loans, they, most of the times, fail to pay because they cannot afford to make the higher payment.

Many buyers accepted those offers without doing enough research on these types of loans; therefore, we will see the causes and effects of subprime mortgage rates.

First, the “subprime mortgage” started between the middle of the year 2005 and the end of the year 2007 driven by low-interest rates and “excess liquidity”. During this period, Mortgage brokers offered potential buyers the opportunity of obtaining their dream home.

In those years, mortgage brokers, motivated to earn a big commission, talked to potential buyers with bad credit into accepting housing mortgages. Buyers were required a low or no down payment at all. In addition, buyers did not need proper tax documentation, and buyers’ credit checks were not required. This was the groundwork for the beginning of the mortgage meltdown. These loans, “adjustable rate mortgages (ARMs) were known as subprime mortgages,” usually are offered at two or three poin...

... middle of paper ..., which is hurting our economy. This crisis is widening across the globe, and it does not show any sign of its ending.

However, a new atmosphere may also lead to new solutions for this crisis. Lenders are now facing a decrease on home prices. In addition, home-foreclosure process may cost lenders tens of thousands of dollars. Renegotiating loans “lowering the interest rate or extending the payment period” could be smarter than foreclosing a home.

Works Cited

Schwarcz, Steven L. "Markets, Systemic Risk, and the Subprime Mortgage Crisis." Duke Law School Faculty Scholarship Series. (2008).

Wilson, Jim. “Foreclosures.” The New York Times. (March 2011).

Bostic, Raphael W. Lee, Kwan Ok. Mortgages, Risk, and Homeownership among Low- and Moderate-Income Families. The American Economic Review. American Economic Association. (May 2008). p. 310-314


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