Most of the subprime mortgages I’ve originated have been for families who needed a "band aid" with their finances or credit. Borrowers in a subprime situation tend to have troubled credit or finances due to either
- Circumstance. Life events that have happened beyond their control. For example, illness, loss of employment, divorce, etc.
- Habit. Lack of financial discipline or responsibility. History of the same behavior such as bounced checks, collections, late payments, etc.
The subprime mortgage is not intended to be "long term" financing. It is temporary (often with a 2 or 3 year fixed payment period) and people with them need to be working on improving their financial situation so that when the prepayment penalty is over and their payment is about to adjust, i.e. that band aid is about to be ripped of their ouchie, the sting is not so bad.
During the 2-3 commitment period of the subprime mortgage (there is often a prepayment penalty associated with these types of mortgages), I have encouraged my clients to work on improving their credit scores and making changes in how they spend and save money.
Now is a great time to review your spending habits. If you’re reading this now, you probably have a personal computer that came all ready equipped with programs like Quicken or Microsoft Money. Begin by reviewing what you’re currently spending every day and decide where you can make better choices. Do you absolutely need to have a double tall latte everyday? Having a $3 coffee drink on your way to the office equals $780 per year! (I’m only counting weekdays and one drink a day–if you enjoy an afternoon coffee break, the cost is of course, higher). You should be able to notice spending that is not needed (need is different than want). Creating and following a budget will greatly help you plan for your financial future. Cutting back on luxury items, such as lattes or going out to lunch and dinner, will provide you with extra cash to pay down credit cards and other debts.