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By Maryland Newsline Subprime loans are higher-priced loans usually given to borrowers with little credit history or with low credit scores, according to Maryland’s Office of the Commissioner of Financial Regulation. The higher prices - in the form of increased fees and interest rates - are meant to compensate for greater risk taken by the lender. These loans take a number of forms. For example: • Payment option ARM (adjustable rate mortgage) loans are the general category under which “exotic” mortgage products fall. They allow borrowers to choose from several payment options, many of which may allow the debt on the home to increase. • Zero percent interest loans, which begin with a “teaser” rate of zero percent interest. This rate remains at zero for only a very short time, sometimes only a month or two, then converts to an adjustable rate, which can result in dramatically higher payments. • Interest-only loans, which require the borrower only to make payments on the interest at the beginning of the loan. At the end of the initial period, the borrower has to begin making payments on both the principal and interest, resulting in much larger payments. • ”2/28” or “3/27” loans are 30-year mortgages that have a fixed-interest rate for the first two or three years, which then becomes an adjustable rate for the remaining years of the life of the loan. • Negative amortization loans allow borrowers to make monthly payments that are not enough to cover the principal and interest payments. The unpaid interest becomes part of the balance, causing the borrower’s debt to increase every month rather than decrease. Borrowers can end up owing more than the property is worth. • Reduced documentation loans, also known as “low doc/no doc” loans, allow a lender to set a reduced standard for verification of a borrower’s ability to repay a loan. • Simultaneous second-lien loans are arrangements in which borrowers are permitted to take out a home equity line of credit (borrowing against the equity in the home) at the same time as the mortgage is originated. These arrangements are often entered into in order to allow for a smaller-than-normal down payment. --By Tamra Tomlinson
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