2023-11-18 23:12:10
Definition: A subprime mortgage is a home loan made to applicants with poor credit who generally do not qualify for traditional mortgages.
What does subprime mortgage mean?
What is the definition of subprime mortgages? Since these loans are extremely risky for the lender, they typically have a higher interest rate than the prime rate. Hence the name.
These mortgages are based on the somewhat controversial and highly questionable practices of allowing those with extremely low credit scores to receive mortgages. However, the problem is that these mortgages usually have very high interest rates that are usually adjustable. This is where much of the controversy lies. Many subprime mortgages attract customers with interest rates that are initially very low and then, after a period of time, like a year, for example, the interest rate will skyrocket and the mortgage payments will increase exponentially.
Typically, subprime mortgages have absolutely nothing to do with business. However, in the years before the housing industry collapsed in 2008, many companies began selling mortgage-backed securities that sometimes contained subprime mortgages. Mortgage-backed securities are not a new invention, but the inclusion of subprime mortgages in these securities was a new idea.
The problem that arose from this practice was that the risk of default on these loans was significantly higher than that of other mortgage-backed securities because borrowers were unlikely to continue making payments. As we all know, many borrowers ended up defaulting on loans, essentially costing investors billions of dollars.
Let’s take a look at an example.
Example
John is looking for a loan for a house he is interested in purchasing. However, John does not have a very good credit history and has frequently defaulted or been late on his loan payments in the past. As a result, John’s credit score is extremely low. Therefore, John will not be approved for a traditional loan. He should apply for subprime.
After receiving said loan, John’s monthly payment was only $300, which was affordable for John. However, after a 12-month period, the prime rate increased and John’s floating rate loan also skyrocketed. Now his monthly payment is $1,000 per month. Unfortunately, the payment became too much for John and he was forced to default on his loan.
Summary definition
Define high mortgages risk : high mortgage risk means a loan to purchase a home that is made available to people with a credit score of less than 600 who would not otherwise qualify for a traditional private mortgage.
Content
1 What does subprime mortgage mean? 2 Example 3 Summary definition
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