Where we Stand Today with Sub Prime Mortgages.
In the summer of 2005, sub-prime mortgage lending was at its peak. Rates were relatively low and lending guidelines were relatively loose.
Borrowers typically chose between two main products of sub-prime loan. They either locked the initial rate in for 2 years or for 3. The predominate choice at the time was the 3/27.
The 3/27 had a few basic traits: A fixed, 3-year “starter rate” and every six months thereafter, the mortgage rate changed. The formula by which it changed was usually (4.999 percent + the 6-month LIBOR rate). If the loan was interest only, it usually converted to principal + interest at the first adjustment, too.
Since around August of 2005 was the very peak of sub-prime lending, it only makes sense that the height of its adjustments would take place now.
Currently the 6 month LIBOR stands around 3.15 precent. This can be relatively good news for many people with sub-prime loans. It means that the adjustment will be somewhere in the 8 - 9 precent range which is down from 11 - 12 percent not long ago.
This is versus the rate of 10.30 - 11.30 percent that sub-prime borrowers faced last summer when LIBOR was much higher than it is today.
Obviously an interest rate increase of any size can cause difficulty. If you’re a sub-prime borrower and having difficulty be sure to contact your lender before you go into default.
