The Truth About 'Non-Prime' Mortgages

  • One thing that separates humankind from the animals is our ability to learn from past mistakes. We've all heard the famous quote from (I believe) Edmund Burke "Those who don't know history are doomed to repeat it.? But sometimes I wonder if we don't take it seriously.


    Take for instance an article I just saw on subprime mortgages. You remember subprime mortgages. Those were the mortgages that banks gave to borrowers who were likely to have trouble making payments. The mortgages that blew up when the banks couldn't collect and had to foreclose. The mortgages that caused housing prices to plummet. The mortgages that nearly caused the collapse of the banking system and the economy in 2008.


    Well, they're back! According to an article by Steve Rhode this time they're calling them "Non-prime mortgages" and giving them out to people with a FICO score as low as 500.


    Now, just to make it clear, I'm not against poor people owning their own home. Everyone needs shelter. But, as we should have learned 10 years ago, giving someone a mortgage they can't afford is not doing them a favor. It's just setting them up for a big problem in the future.


    A second article explains that Goldman Sachs expects interest rates to rise by more than 1/2 percent in the next year. They base this forecast on the fact unemployment has been going down and that the federal government deficit has been going up at the same time. Since 1948 that's only happened twice (during the Korean and Vietnam wars).


    What can smart Dollar Stretchers do? Avoid taking a mortgage if your FICO score is below the mid-700s. Save first and when your credit score improves you'll be in the financial position to own and KEEP your home.


    You can also be wise about any real estate investments. Historically when lenders start stretching their rules it means that we're nearing a market top (and a correction is on the horizon). So the time to move to a bigger more expensive home is quickly fading. In fact it might be time to sell that big house and buy something less expensive. Empty nesters ready to downsize perhaps?


    The window is also closing on refinancing your mortgage or refinancing your auto loan. If you have any plans in that direction you'll want to act soon.


    Many people were caught by surprise in 2008. But others studied history and knew that the excesses of the previous years couldn't last without a correction. Let's you and I be among those who are prepared for the next correction.


    Keep on Stretching those Dollars!

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