Many hardworking people have suffered having their version of the American dream crushed by a foreclosure. No one sets out to get into a mortgage only to end up in default and out on the street while their home is taken into foreclosure. Unfortunately, this has been the reality for many. As the nation works to help combat the foreclosure crisis, we must take a look at some of the reasons why foreclosures happen in order to get a better idea of how to prevent them.
When the housing market began to flourish, many people were denied based on inadequate credit scores. The solution was to offer mortgage applicants a subprime mortgage, which essentially allows applicants with subprime credit ratings to secure a mortgage at a higher interest rate than other applicants. In some cases, the initial interest rate would start out fairly reasonable but would adjust upwards over time or with the fluctuations in the national prime rate. Since subprime mortgage holders were not considered to be top borrowers, they often were left with unreasonable mortgage terms and conditions.
Adjustable Rate Mortgages
Often viewed as a great deal for first time homebuyers, adjustable rate mortgages became popular in the early 2000s. Offering low introductory interest rates that increased on schedule over time, many people felt they could later compensate for increased interest rate. Not only were homeowners susceptible to their rate adjusting on a predetermine schedule, the rates were also vulnerable to inflations with the national interest rate. Unfortunately, many people simply could not afford to keep up with rising interest rates, which subsequently increased their monthly mortgage payments dramatically.
Home Value Depreciation
When the housing market began to slow down, and eventually take a turn for the worse, many people found themselves underwater in their mortgage. Now responsible for a mortgage loan that is significantly higher than what the home is worth, many found selling the home to be removed from the list of options. Forced to stay in the home and hope to ride out the drop in value, many people found themselves unable to support the mortgage payment in a sinking market.