You might have heard of the term “subprime mortgage” and how it supposedly caused the 2008 Financial Crisis in the United States. Recently, there’s been talk about subprime mortgages making a comeback. Would it still be safe to get one?
This article will try to briefly catch you up on what subprime mortgage is to help you make decisions going forward:
What Is A Subprime Mortgage?
Mortgages are only given to people with sufficient credit score and downpayment (usually, at least 20% of the house). A subprime mortgage has more forgiving requirements. It is given to homebuyers with low credit score and delinquent payment history. In exchange, subprime mortgages have higher interests after a short period of lower interest rates (called teaser rates).
If you have bad credit or bad payment delinquencies, a subprime mortgage might have been your only option back around 2008.
Subprime mortgages gave a lot of people houses — even people that shouldn’t be given houses, considering their history. They are more likely to fail to pay on time and default on their mortgages. This made subprime mortgages a high-risk high-reward investment for the banks who sign these mortgages.
However, the risk was negligible to banks because they sold the mortgages to investors through CDO (Collateralized Debt Obligations) bonds. This passed the risk to investors who had little understanding of how risks, only listening to their brokers about how high reward it is.
In the end, when a lot of these subprime mortgages ended in defaults, there were a lot of houses sent back to the market for sale. This ended in an increased supply of houses with little demand, crashing the prices of the houses and giving negative returns to the investors. The housing market and the whole financial industry, which was seen as ‘too big to fail’, failed.
Is Subprime Mortgage Bad, Then?
Subprime mortgages played a central role in the 2008 recession. However, there was a lot of variables that led to the crisis. For example, it could be said that financial deregulation and irresponsible trading of CDOs caused the crash. One thing’s for sure: when greed wins, everyone else loses in the end.
Should I Get Subprime Mortgages?
Considering that the young generation starts life with debts, subprime mortgages are more helpful than irresponsible. There must be appropriate scrutiny and caution in place to avoid investment exploitation. Anyway, if you’re applying for a mortgage, you need to make sure that you have the right securities to pay for it. You need to know that you have the ability to pay for it. If you’re determined to get a loan, Golden Eagle Mortgage Group helps you get quick and easy financing that’s right for you. Click here to apply for a mortgage pre-approval.
(READ MORE: Mortgage Pre-Approval EXPLAINED)
