Alt-A
Quick quiz: Which of the following best describes Alt-A?
A) A short-lived accordion-based side project fronted by Eddie Vedder that produced one album in the late 1990s
B) A fringe group dedicated to re-ordering the alphabet
C) A now-defunct keyboard command that would automatically initiate an arbitration claim against Microsoft
D) Something to do with mortgage borrowers' credit quality.
Sadly, the answer is (D), though Eddie Vedder did have his ukulele phase...
Mortgage lenders sort borrowers into two main categories: prime and sub-prime. As you might guess from the way the names are constructed, prime borrowers are higher quality and sub-prime are lower quality.
Alt-A represents a space in between. The designation represents the middle ground of mortgage risk.
Prime borrowers are highly likely to make their house payment each month. Subprime borrowers are much riskier. Alt-A borrowers usually have most signs going for them that they will be able to keep up their payments, but with some red flags. Maybe the house they are buying is slightly more expensive than their income justifies. Maybe their documentation is incomplete for some reason.
The Alt-A borrowers will likely have to pay higher interest rates than a prime borrower would to make up for the lower credit quality. Also, they might not get approved by all lenders.
Related or Semi-related Video
Finance: What is Interest Only Mortgage?17 Views
Finance allah shmoop what is an interest only mortgage Well
simply put it's when you only pay the rent on
the dough you borrowed you don't pay down the principal
you owe like if you have a three hundred thousand
dollars mortgage at six percent interest you're paying eighteen grand
a year to rent that money in six percent times
three hundred rands eighteen grand a year But the principal
you borrowed is likely due in thirty years So in
theory anyway if it were a normal mortgage you'd want
to pay down the principal little bit a month as
you go along like averaging ten grand a year in
principle pay down over thirty years That's times ten grand
right three hundred grand their total owning your home at
the end yeah yeah priceless that's what holmes work So
why would you want an interest only mortgage Well for
one thing the monthly payments or less so maybe you
could afford morehouse If on a thirty year three hundred
thousand dollar loan at six percent you're paying interest only
while you're writing a check each month for eighteen thousand
divided by twelve or fifteen hundred bucks maybe that's all
You can afford well the extra five hundred bucks arm
or you'd right toe pay down your principles Just not
something you can really do right now Maybe after three
years of scrimping and saving well you'll be able to
start paying down that principal reducing risk and making life
easier all the way around But right now you can't
afford it so the only thing you can do is
do the interest only dance Well the other reason you
might want an interest only mortgages that interest costs are
tax deductible Principal pay down costs are not so if
in a given mortgage payment of say eighteen hundred bucks
a month where three hundred of it is principal pay
down and fifteen hundred of it is interest well on
ly the fifteen hundred is tax deductible That three hundred
of pay down is not And if you're a forty
percent taxpayer the government is essentially picking up the tax
savings on the fifteen hundred times a forty percent at
six hundred dollars in interest You're paying such that they
quote feel unquote like the fifteen hundred is really only
about nine hundred a month in cost to you the
three hundred bucks and principal paydown feels like a full
three hundred dollars So some people seeking tio optimize their
tax deductions live in the world of interest only mortgages
and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it
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