Free the Drones Personal Finance Blog

A New Round Of Foreclosures On Subprime Mortgages

December 21st, 2006

This isn’t going to be good for a lot of people - the foreclosure rates on “subprime” loans (those for people with less than perfect credit histories) have an increasing number of foreclosures in recent months. Part of the problem is that people got into loans they really shouldn’t have - in recent years, that’s been easier to do both because banks have been more willing to extend credit and because financial instruments such as ARM’s have become more and more complicated for consumer loans, offering low initial rates that can get jacked up later on. The other part is that real estate markets have cooled off in a lot of places, making it very hard for people to sell their house for enough to pay off the loan if they bought recently.

The lesson out of this should be that it’s not ALWAYS a good idea to buy a house. In many situations it is - but if you’re borrowing so much that small financial problems can keep you from making the payments, you should put it off until you can make a bigger downpayment. If you can’t afford the 5% that has been generally considered the minimum in the past, you probably shouldn’t buy. A bigger down payment is better because you get more wiggle room, but doing a zero-down home loan is risky on its own if there’s a chance you might have to sell later on. It’s very easy to get “upside down” if prices drop (where you owe more than your house is worth). A lot of people have been using little tricks like this for the past few years to get houses that are a stretch for them to buy. Now it’s coming back to bite them.

Discuss this in the Free the Drones Forums.

Posted by kneukm03 Filed in Real Estate