In simplest terms,what is a sub prime mortgage

A mortgage given to someone who would not qualify due to credit or income for a real mortgage. That is as simple as l can make it.

A sub prime mortgage is one that allows the borrower to pay less each month than the interest that accumulated on the loan. For example, u might have a monthly minimum payment of $800, even though there was $1000 of interest that accumulated that month. The remaining interest is added to the balance of the loan. They r almost always variable interest rate loans, so the rates go way up after a few years.

They r a very risky way to buy a house. A few years ago when housing prices were going up rapidly, people just figured they could get away with it. For example, if u owe $100,000 on a loan, & ur balance goes up $200, so u now owe $100,200 that would be okay if the value of ur house had gone up by $5000 that month. But now that prices r going down, people r getting burned. People owe more on their house than what their house is worth, they can not afford the payments, & they can not sell it for enough to pay off the loan. The banks then foreclose, auction the house off, & end up loosing thousands of dollars because they can not sell the house for enough to get their money back.

Simple and to the point answer! Lenders will not do these again.

Your credit stinks, but for some reason (government program maybe) a bank will lend anyway, but charge a significantly higher interest.

Lenders (ie. u & me) r graded, sort of like chunks of meat.

You've got ur AAA AA A & sub-prime. AAA is the best. Solid income, solid credit history, low risk of defaulting on the mortgage.

Sub-prime have low income, maybe a checkered credit history (maybe defaulted on an earlier loan), & r overall a bad risk for a mortgage. If u fall into the sub-prime category, u can still get a mortgage, but be prepared for higher interest rates & large payments.

Normally, most banks limit how many sub-prime mortgages they'd deal with. After all, these were the people that were most likely to default. However when the banks started getting greedy, they started giving out more sub-prime mortgages & then mixing them with prime (good) mortgages. Soon, all the banks were doing this. They all secretly sold off their sub-prime mortgages to ''the other guy'' - not realizing they each were ''the other guy''.

Well, the inevitable happened. The holders of many of these bad mortgages started defaulting, meaning the banks suddenly started losing money - & fast. They lost so much money so quickly that they started running into the laws about how much cash a bank was required to have on hand vs. their investments. When a bank goes below this amount (too little cash on hand) the bank fails, & falls into government control.

That is where we r right now. Although the bailout was signed, it is uncertain how exactly that is going to fix anything. What, now the government owns $700bln in sub-prime mortgages which r most likely going to go into foreclosure? How exactly does this translate into stabilizing our banks,- much less how does this NOT translate into the worst purchase in US history - has yet to play out.