What exactly is a subprime loan? You want to buy a house. You have no money for a down payment. You have no way to prove how much money you earn. This normally would and should be a no brainer. You can’t buy a house. Enter the subprime loan.
No money down, low interest rates for the first few years of the loan, no credit check. It sounds crazy now doesn’t it. Don’t worry if the interest rate on your house triples after five years. Since your house will always increase in value you will be able to refinance or sell at a profit long before you get into trouble.
Subprime loans have always existed. Most financial institutions have always had a small percentage of subprime, risky loans. What happens if that small percentage of risky loans becomes a large percentage? What happens if housing prices decrease instead of increase? Welcome to 2009.
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