Tuesday, December 02, 2008

SubPrime Mortgages

We have all been hearing about "sub-prime" mortgages so I thought I'd do a 90 second explanation. * Basically, the more likely you are to pay back a loan, the lower rate you pay for the money. Your likelihood to repay is calculated by three credit rating agencies using several factors to generate a credit score. You can read more here, but basically the agencies but a big emphasis on your payment history (are bills always paid ontime?) and how much you owe (are you using 30% or 90% of your available credit? 30% is much better). The remaining categories represent a combined third of your score: length of credit score (longer-->better), New Credit/Inquiries (it hurts when lots of people pull your credit score), and Types of Credit (more kinds are generally better but not enough to warrant risking not paying a bill). The score range varies by company and is about 300-850. Higher is better.

For example, check out how the rates an monthly payments vary by credit score for a 30-year fixed loan of about $300,000:

A person with very marginal credit (550) pays about 55% more per month than someone with excellent credit. The good news is that those people weren't able to get loans at all in the old days, the bad news is that they pay a ginormous premium for being sub-prime borrowers. Generally speaking, 680 is the cutoff for a "Prime Rate" loan but it is a sliding scale.

*I started working on predatory lending, sub-prime policy, etc while I was interning at The Reinvestment Fund.


At 12/02/2008 , Blogger bpt said...

don't they also figure in the percent a buyer puts down on the property, vs the % borrowed? Higher down payment is better. duh.

At 12/10/2008 , Anonymous Anonymous said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.



At 2/10/2009 , Blogger C.H. said...

Hey ZT!

My name is Charlie Hoehn. I'm working with Ramit Sethi of iwillteachyoutoberich.com and he pointed me to this post.

Couple of things I wanted to ask you:

1. Ramit just put out a private video on automating your finances and we wanted to send it to you as a thank-you.
2. His new book is coming out, and we've been cooking up some pretty interesting stuff to go along with it. Can I send you some more info and the link to the video? If yes, please drop me a line as soon as possible -- charhoehn (at) gmail.com




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