The drastic slowdown in the real estate market in the United States is being felt around the world. At the heart of this economic downturn is the subprime crisis facing many American home owners.
The subprime crisis refers to the recent avalanche of homeowners defaulting on their home loans. When someone defaults on a loan, they essentially stop repaying the loan and give up trying to meet the initial repayment plan.
Many of these home owners had subprime loans. These are loans that require little money up front and often start off with affordable payments . However, these subprime loans often have adjustable interest rates, which mean that over time, the interest rate for the loans can drastically go up. Higher interest rates mean higher monthly payments.
As a result, homeowners with subprime loans found themselves with rising home payments they could not afford. In many cases, the home loan payments became so large that the homeowners could not meet the monthly payments, and as a result, they had to turn their home over to the bank they borrowed money from.
The subprime home loan collapse has not only hit home owners. Many investment banks that had invested in these loans by financing the loan market have been hard hit as well, as they have not been able to collect on their initial investment.
