Imagine this scenario: you, like millions of others, decide to follow your dream and buy a home. As you start looking for homes for sale, you come across one you feel is your perfect dream home. It needs a little work, but then again, what house doesn’t. After all, you want to give your new home some of your own personality.
The next step is to get the money secured and then close the deal. After searching for a lender that would even talk to you, you fall into the hands of a new kind of lender that lures you in with a small teaser interest rate requiring no money down. It seems like a dream come true.
You have just fallen into the hands of a subprime lender. These subprime lenders will usually target those with weak credit ratings, offer them low “teaser” rates, only to raise them a short time later. Last year these lenders made up about twenty percent of the market for new mortgages. As the once hot housing market starts to cool down, many people who signed on the dotted line for a subprime loan are now having second thoughts and struggles to keep their home.
Now, let’s continue with our scenario. You have secured a loan from a lender who quoted an interest rate of 6.5 percent. You also felt blessed because you did not have to have a down payment. Therefore, after crunching some numbers at home, you decide at 6.5 percent interest, you could afford your dream home after all.
However, on signing day, here is what happens; you were offered two separate loans. The first one was for ninety percent of the loan amount at 8.5 percent interest. The second was for the remainder of the loan amount at 14 percent interest. So you decide for the extra four hundred dollars a month (and rising), you both can work a little overtime.
All this seemed to work well when the housing market was up. For those whose credit was a little shaky, it was a good way to buy a home, refinance and sell for a profit. However, since the housing market has turned, more families are finding themselves struggling to make their payments. Let’s finish our scenario.
Things are going pretty good. You two and your children have moved in and you have managed to keep up the payments for a few months. Then the unexpected happens. Your place of employment needed to make cuts and you were one of them. Since you were unable to save money because of your high payments, you fall behind in making your house payments. After three months, you manage to find a job, but with less pay, so you start to set up payments to cover the months you missed. Your new house payments are now three hundred dollars higher and you find yourself unable to keep up.
Because your home is now worth less on the market, and because you also still owe for most of the house, you cannot sell or refinance. In the meantime, your lender is telling you that you need to make even higher payments to catch up again or they will foreclose on you. In order so save your family and your marriage, you both agree to foreclose and try again in a few years. You can only hope now someone will pay the price you need so you will not have to file for bankruptcy.
In the meantime, you will arm yourself with more knowledge and learn when to ask questions and when to walk away when you feel the need to.