Chuck Bentley on Subprime Loans

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Dear Chuck,

My husband and I would love to buy a home before our second child is born next spring. We are seriously considering a subprime loan since we don’t have a down payment. We have a few years left on our student loans, and a car payment. We’ve been told that renting is like throwing money away every month. What are your thoughts?

Primed for a Home

Dear Primed,

Well first, congratulations on the good news that you have another child on the way!

subprime loan is a mortgage loan offered to those who wouldn’t be eligible for a conventional mortgage for a number of reasons, including a low credit score, or in your case, no down payment. Because these loans are offered to individuals who pose a higher risk to the lender, they also come along with high interest rates, dramatically increasing what you pay over the lifetime of your loan.

To be straightforward, subprime loans are not a good idea and I would strongly advise against one. I want you to carefully consider the dangers of a subprime loan and some of the options I offer below.

Background and Trends

A decade ago, Lehman Brothers Holdings Inc. collapsed when mortgage delinquencies and the market slump turned their assets sour. It propelled the government and central bank into rescue mode. But, today there are rumblings of new risks on the horizon, including another recession.

In 2006, real estate prices began falling and by 2008, many homeowners owed more on their house than it was worth. They were “underwater” due to job loss, other bills or insufficient income to begin with, and could not sell the homes to pay off the mortgage. So, many defaulted.

Today, similar to 10 years ago, the more highly leveraged the household, the greater the possibility of default or foreclosure. In more basic terms – the more you owe the bank, the less likely you’ll hold on to your house, especially in the case of economic turbulence. Any tremor or shock in the economy can totally disrupt a homeowner’s ability to cover expenses.

Consider your Options

I’m familiar with the common advice that you should avoid renting since it’s just “throwing money away” and while I understand the intention of this advice, I think it oversimplifies a complicated decision.

First of all, your rent pays for a place for you to live, which, in my opinion, is a dollar well-spent! Your rent is not building any equity for you, but it gives you flexibility if your job or income changes, exempts you from condo/HOA fees, and puts the responsibility of any maintenance and repairs on your landlord. Your insurance is cheaper, you don’t have closing or selling costs, and you’re not on the hook if your dishwasher breaks. Often (and hopefully) your monthly rent is less than a mortgage would be, so it should allow you to save and live with financial margin.

Furthermore, home ownership is not for everyone and comes with a laundry list (pun intended) of responsibilities and financial commitments. Before you apply for a single loan, take the following into consideration.

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Source: Christian Post