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

00:00

Finance allah shmoop what is an interest only mortgage Well

00:07

simply put it's when you only pay the rent on

00:10

the dough you borrowed you don't pay down the principal

00:14

you owe like if you have a three hundred thousand

00:16

dollars mortgage at six percent interest you're paying eighteen grand

00:19

a year to rent that money in six percent times

00:22

three hundred rands eighteen grand a year But the principal

00:25

you borrowed is likely due in thirty years So in

00:28

theory anyway if it were a normal mortgage you'd want

00:32

to pay down the principal little bit a month as

00:34

you go along like averaging ten grand a year in

00:37

principle pay down over thirty years That's times ten grand

00:41

right three hundred grand their total owning your home at

00:44

the end yeah yeah priceless that's what holmes work So

00:47

why would you want an interest only mortgage Well for

00:51

one thing the monthly payments or less so maybe you

00:54

could afford morehouse If on a thirty year three hundred

00:57

thousand dollar loan at six percent you're paying interest only

01:00

while you're writing a check each month for eighteen thousand

01:03

divided by twelve or fifteen hundred bucks maybe that's all

01:06

You can afford well the extra five hundred bucks arm

01:09

or you'd right toe pay down your principles Just not

01:12

something you can really do right now Maybe after three

01:15

years of scrimping and saving well you'll be able to

01:18

start paying down that principal reducing risk and making life

01:21

easier all the way around But right now you can't

01:24

afford it so the only thing you can do is

01:26

do the interest only dance Well the other reason you

01:28

might want an interest only mortgages that interest costs are

01:31

tax deductible Principal pay down costs are not so if

01:37

in a given mortgage payment of say eighteen hundred bucks

01:40

a month where three hundred of it is principal pay

01:43

down and fifteen hundred of it is interest well on

01:47

ly the fifteen hundred is tax deductible That three hundred

01:51

of pay down is not And if you're a forty

01:53

percent taxpayer the government is essentially picking up the tax

01:58

savings on the fifteen hundred times a forty percent at

02:02

six hundred dollars in interest You're paying such that they

02:05

quote feel unquote like the fifteen hundred is really only

02:10

about nine hundred a month in cost to you the

02:13

three hundred bucks and principal paydown feels like a full

02:16

three hundred dollars So some people seeking tio optimize their

02:19

tax deductions live in the world of interest only mortgages

02:23

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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