Welcome to brain Stuff from how stuffworks dot com where smart Happens. Hi, I'm Marshall Brains. They are all over the news right now and they are called subprime mortgages. But what exactly is a subprime mortgage? The word subprime refers to a type of borrower. A person who has been categorized as subprime is someone who has an imperfect credit history. For example, the person may have had a problem with missed payments or a prior foreclosure or a bankruptcy.
This leads to a low credit score, generally below six thirty. In other words, this type of borrower is considered to be at a higher risk for defaulting on a loan. So a subprime mortgage is a mortgage that's given to a subprime borrower. The general idea in a subprime mortgage is that because the person is a higher risk, the person will be charged a higher interest rate. For example, the person might be given an adjustable rate mortgage that has a low rate initially and then adjust much higher.
The thing that caused the subprime mortgage crisis is the fact that borrowers started a default on their loans at a much higher rate than expected. With so many houses, flooding the foreclosure market. It will have a big negative effect on banks and perhaps the housing market as a whole. Do you have any ideas or suggestions for this podcast? If so, please send me an email at podcast at how stuff works dot com. For more on this and thousands of other topics, go to how stuff works dot com.