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Patti, Home Owner in Hanford, CA

What is a subprime loan and is it a good idea to do this kind of loan?

Asked by Patti, Hanford, CA Thu May 14, 2009

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Hi Patti,

There are still companies out there selling these loans. Stay away from them. Dana mentioned below these are the loans that got us into this mess. An example of a subprime loan is what is called a pick-a-pay. You choose your monthly payment from three diffent payment levels. Example, you can pay $1,300.00 a month, or $1,900.00 a month, or $2,900.00 a month. Most people choose $1,300.00 a month because it was the lowest payment. The problem is at $1,300.00 you're not covering the interest of your loan, let alone your principle on a monthly basis. Therfore the difference in principle & interest not being paid was applied on a monthly basis to the back end of your loan. The $1,900.00 payment would only cover your interest and no principle on a monthly basis. The $2,900.00 is the payment you should have been making on a month to month basis because it covered both principle and interest therfore paying down your loan. Once the market changed many people found their equity had been taken away thanks to the low monthly payment they had been making for four or five years. Lastly, the banks wanted their money at the 4 & 5 year marks. This meant many families saw their payments go from $1,300.00 a month to $1,900.00 in a single month. It became worse when their payment would go to $2,900.00 the following month. These loans are bad news and you should always avoid them. If I can answer any further questions please feel free to let me know. Thank you.

Matt
1 vote Thank Flag Link Thu May 14, 2009
They aren't really making subprime loans anymore (unless you get a hard money private loan which are not common). People with credit challenges are getting FHA loans. FHA loans are 30 year fixed, have low rates and no pre-payment penalties. The 2 yr and 3 yr ARM subprime loans with pre payment penalties and high margins are things of the past for now.
0 votes Thank Flag Link Thu May 14, 2009
I d not believe these loans exist anymore. subprime loans are what got us into this mess in the first place!
0 votes Thank Flag Link Thu May 14, 2009
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