Definition of a High Yield Mortgage
A high yield mortgage is a mortgage with a higher than average interest rate. The yield refers to the compound interest charged on the mortgage, also known as the Annual Percentage Rate (APR). The yield is the interest paid to the mortgage holder, as interest, and is income for the mortgage holder.
Mr. McGillicuddy desires to obtain a mortgage on his home for $200,000. Due to problems with his credit history, Mr. McGillicuddy only qualifies for a mortgage of 9%, or several percentage points above the normal mortgage rates. The additional interest Mr. McGillicuddy pays classifies the mortgage as a high yield mortgage, as it provides additional income to the bank.
The Use of High Yield Mortgages
High yield mortgages are used for borrowers with either a weakened credit history or other factors that make the mortgage loan riskier. The risk of default on such a mortgage is usually greater, so in order for the mortgage lender to be enticed to loan money, a greater premium needs to be paid. A sub-prime mortgage is a form of a high yield mortgage, as the borrowers usually pay a higher interest rate.
Advantages of a High Yield Mortgage
There are some advantages of a high yield mortgage, though they are not a first choice option. A potential homeowner may not be able to purchase a home without a high yield mortgage and it may be more beneficial for that person to buy a home at a higher interest rate than continue renting. Should the borrower’s credit situation improve in the future, the borrower may be able to refinance the mortgage and choose a more advantageous interest rate.
Alternatively, if a homeowner has a great deal of high interest, unsecured debt, they may consider obtaining a high yield mortgage in the form of a second mortgage in order to reduce their monthly debt payments by lowering their interest rate.
Mr. McGillicuddy has $100,000 in equity in his home. Mr. McGillicuddy has the following unsecured debts, in addition to his first mortgage:
Car loan – $15,000 @ 7% – Monthly Payment of $359.00
Credit cards – $20,000 @18% – Monthly Payment of $360.00
Personal loan – $10,000 @12% – Monthly Payment of $263.00
Total Debt – $45,000 – Total Monthly Payment of $982.00
If Mr. McGillicuddy obtains a second mortgage at 9% interest, the monthly payments would be $404.00 per month, or less than half of the amount made in payments.
First Foundation DOES NOT specialize in high yield or sub prime mortgage products.
If you are beginning to struggle with debt be sure to contact us before your credit is damaged – we may be able to provide a solution that could help you avoid the need for a high interest, high yield mortgage product.
If you are interested in learning more about high yield mortgage, please feel free to contact us today!