Mortgage Products - Negative Amortization & Home Equity Line of Credit
In the previous two articles, we have studied the different types of mortgages from the borrowers as well as from the lenders point of view. In this article we will look at some products which were called the byproduct of financial innovation. At first these products were applauded as being solutions to many problems. However, later when the financial markets went bust, these products ended up aggravating the crisis. There are many such products. However, most of the products are complicated and would be difficult to explain here. In this article, we will have a look at the two most commonly used out of these products i.e. negative amortization and home equity line of credit.
Negative Amortization Loans
Perhaps the most dangerous financial innovation of the subprime lending was a mortgage product known as negative amortization. Colloquially it was also referred to as step up loan. This loan was designed keeping in mind the needs of wannabe borrowers. This means this loan was designed to lure people to bet on the rise of their future income and take out loans which they will not be able to manage in the future. Banks have denied these charges and state that the risks of the negative amortization loans were well stated. However, borrowers and critics feel otherwise. Lets have a closer look at this financial innovation.
Home Equity Line Of Credit
Another dangerous type of financial innovation propagated by the banks during the subprime mortgage crisis is called Home Equity Line of Credit or HELOC for short. This arrangement allows for an abundance of credit and encourages the unsuspecting borrower to resort to unsustainable financial behavior.
Both Negative Amortization and HELOC were applauded as being cutting edge financial innovations. However, they have done more harm than good. When the subprime mortgage market went down, a lot of people lost their homes and their lives savings thanks to these products.
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