By mid 2005, the sub-prime lending problem (to come) had reached its peak. Interest rates were lower than they had been in decades and underwriting standards were very lax.
Borrowers typically chose between two main products of sub-prime loan. They either locked the initial rate in for 2 years or for 3. The predominate choice at the time was the 3/27.
The 3/27 had a few basic traits: A fixed, 3-year "starter rate" and every six months thereafter, the mortgage rate changed. The formula by which it changed was usually (4.999 percent + the 6-month LIBOR rate). If the loan was interest only, it usually converted to principal + interest at the first adjustment, too.
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.
This is versus the rate of 10.30 - 11.30 percent that sub-prime borrowers faced last summer when LIBOR was much higher than it is today.
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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