See: Subprime. See: Mortgage. See: Subprime Meltdown.
A prime mortgage is a home loan of, say, $450,000 granted to a power couple with no kids, where she earns $285,000 a year as a divorce lawyer and he earns $240,000 as a proctologist. They bought a $600,000 home, putting $150,000 down (low risk to the bank of the home being worth less than $450,000 plus costs), and this couple has over a million bucks invested in the stock market. Very prime. Very low odds of failing to pay on this mortgage.
Subprime is the couple who stretches to get there. She's a non-union school teacher making $52,000 a year; he's a Home Depot manager making $48,000 a year. Together, they make $100,000, and they want a house as close as they can get to the laywer-and-doctor couple. So they try to borrow $250,000 to buy a $300,000 home, putting just $50,000 down. And no, they have no brokerage account, no real savings. They are...subprime. Sorry, but keepin' it real.
They just didn't have the financial horsepower that the prime couple had, so they're gonna pay higher interest rates, have a way harder time getting a loan, and when they do, well...be very nervous that Home Depot gets Amazon'd, and they're trying to make payments as a one-salary family. Bad sitch.
Related or Semi-related Video
Finance: What is Interest Only Mortgage?17 Views
Finance allah shmoop what is an interest only mortgage Well
simply put it's when you only pay the rent on
the dough you borrowed you don't pay down the principal
you owe like if you have a three hundred thousand
dollars mortgage at six percent interest you're paying eighteen grand
a year to rent that money in six percent times
three hundred rands eighteen grand a year But the principal
you borrowed is likely due in thirty years So in
theory anyway if it were a normal mortgage you'd want
to pay down the principal little bit a month as
you go along like averaging ten grand a year in
principle pay down over thirty years That's times ten grand
right three hundred grand their total owning your home at
the end yeah yeah priceless that's what holmes work So
why would you want an interest only mortgage Well for
one thing the monthly payments or less so maybe you
could afford morehouse If on a thirty year three hundred
thousand dollar loan at six percent you're paying interest only
while you're writing a check each month for eighteen thousand
divided by twelve or fifteen hundred bucks maybe that's all
You can afford well the extra five hundred bucks arm
or you'd right toe pay down your principles Just not
something you can really do right now Maybe after three
years of scrimping and saving well you'll be able to
start paying down that principal reducing risk and making life
easier all the way around But right now you can't
afford it so the only thing you can do is
do the interest only dance Well the other reason you
might want an interest only mortgages that interest costs are
tax deductible Principal pay down costs are not so if
in a given mortgage payment of say eighteen hundred bucks
a month where three hundred of it is principal pay
down and fifteen hundred of it is interest well on
ly the fifteen hundred is tax deductible That three hundred
of pay down is not And if you're a forty
percent taxpayer the government is essentially picking up the tax
savings on the fifteen hundred times a forty percent at
six hundred dollars in interest You're paying such that they
quote feel unquote like the fifteen hundred is really only
about nine hundred a month in cost to you the
three hundred bucks and principal paydown feels like a full
three hundred dollars So some people seeking tio optimize their
tax deductions live in the world of interest only mortgages
and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it
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