The problem with subprime loans doesn't lie solely with subprime lenders. It's the product. Popular subprime loans were often 2/28 adjustable-rate mortgages or Option ARMs.
• A 2/28 works by qualifying the borrower at a fixed-rate for two years.
• Beginning with the third year, the rate changes and fluctuates over the remaining 28 years.
• Typically, rates can move 2 percentage points beginning in the third year, and adjust every six months.
• Common cap rates are 6 points over the initial rate, which means a loan taken out at 5% can reach 11%.
• Many 2/28 loans contain a prepayment penalty, adding insult to injury for those who want to refinance.
To further complicate the situation, since the value of the home rose after one year of occupancy, the owner refinanced his mortgage into another 2/28 mortgage. He also rolled the costs of the mortgage into his loan and financed them, which increased his mortgage balance.
The market value, if a home owner is not selling, is not a major consideration because home prices can fluctuate. It's a cycle. The problem arises when the loan adjusts, and the mortgage payment becomes unaffordable.
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125