In the summer of 2005, sub-prime mortgage lending was at its peak. Rates were relatively low and lending guidelines were relatively loose.
Sub-prime loans came in two main flavors. The 3/27 or 2/28. Simply put the teaser rate was locked for either 2 years or 3 depending on the choice. At its height the 3/27 was the product of choice.
The 3/27 would have a teaser rate that remained fixed for 3 years then begin adjusting. It would usually adjust to the 6-month LIBOR plus a margin of 5.999 percent. This caused rates to sky-rocket at the time of adjustment. Further problems occured when the loan now became a principal and interest mortgage instead of interest only.
Since mid 2005 was the very height of this sub-prime lending activity, it only stands to reason that the height of adjusting would be taking place now.
For those borrowers that chose a sub-prime mortgage, there is some relatively good news. The LIBOR has fallen significantly since the FED started lowering rates. Currently it stands around 3.15 percent which means most adjustments will be in the 8 - 9 percent range.
Borrowers last summer faced a much higher rate because of where the LIBOR stood.
Obviously an interest rate increase of any size can cause difficulty. If you're a sub-prime borrower and having difficulty be sure to contact your lender before you go into default.
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