WEBVTT - How Subprime Loans Work

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<v Speaker 1>Welcome to brain Stuff from how stuffworks dot com where

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<v Speaker 1>smart Happens. Hi, I'm Marshall Brains. They are all over

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<v Speaker 1>the news right now and they are called subprime mortgages.

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<v Speaker 1>But what exactly is a subprime mortgage? The word subprime

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<v Speaker 1>refers to a type of borrower. A person who has

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<v Speaker 1>been categorized as subprime is someone who has an imperfect

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<v Speaker 1>credit history. For example, the person may have had a

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<v Speaker 1>problem with missed payments or a prior foreclosure or a bankruptcy.

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<v Speaker 1>This leads to a low credit score, generally below six thirty.

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<v Speaker 1>In other words, this type of borrower is considered to

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<v Speaker 1>be at a higher risk for defaulting on a loan.

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<v Speaker 1>So a subprime mortgage is a mortgage that's given to

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<v Speaker 1>a subprime borrower. The general idea in a subprime mortgage

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<v Speaker 1>is that because the person is a higher risk, the

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<v Speaker 1>person will be charged a higher interest rate. For example,

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<v Speaker 1>the person might be given an adjustable rate mortgage that

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<v Speaker 1>has a low rate initially and then adjust much higher.

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<v Speaker 1>The thing that caused the subprime mortgage crisis is the

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<v Speaker 1>fact that borrowers started a default on their loans at

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<v Speaker 1>a much higher rate than expected. With so many houses,

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<v Speaker 1>flooding the foreclosure market. It will have a big negative

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<v Speaker 1>effect on banks and perhaps the housing market as a whole.

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