Sub-prime mortgages

Dr Money

There is a lot of news about the default of subprime mortgage. What is the definition of this mortgage?

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His reply:

Sub-prime mortgages are the risky ones in the US. They include interest only loans. It keeps the interest payments low.

Another type of sub-prime loan is option adjustable rate mortgages, also known as option ARMs.

They work like credit card payments. You make a minimum payment on your mortgage. It doesn't even have to cover the full amount of the interest due.

The interest that is unpaid gets added back to the principal -- which keeps growing like a mushroom cloud.

For some, it is the only way to afford expensive homes.

Of course, the loans are risky. But the interest rates are higher than prime mortgage rates -- so lenders like banks and savings and loan institutions in the US have been attracted to them.

Sincerely,

Larry H.