A subprime mortgage is a type of loan given to borrowers with poor credit histories; often below a 600 FICA Score.

As a result of poor credit scores, these borrowers do not qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages charge higher interest rates, above the prime lending rate.

There are several types of subprime mortgage available. However, the most common type of adjustable rate mortgage (ARM) charges a fixed interest rate and then converts to a floating rate based on an index such as LIBOR, plus a margin. The most popular types of ARMs include the 3/27 and 2/28 ARMs.

A 2/28 ARM has a fixed rate for the first two years and then the interest rate adjusts for the next 28 years, which completes the full 30 year term of the loan.  While a 3/27 ARM has a fixed rate for the first 3 years and then adjusts for the next 27 years. The 3/27 mortgage gives a longer period of fixed payments but comes with a slightly higher rate than a 2/28 arm would.

ARMs can be misleading because of the initial lower interest rate. However, when mortgages reset to the higher variable rate, mortgage payments increase significantly. This is the main reason that has caused the sharp increase in the number of subprime mortgage foreclosures that has lead to the current mortgage melt down.

Related Articles:

• How is Your Credit Score Determined?
• Video: Inside the Financial Crisis – Mortgage Madness
  

Below is the first video of NBC’s Dateline report titled “Inside the Financial Crisis: Mortgage Madness” (aired last Sunday 3/22/09).

The show takes an in-debt look at the current mortgage crisis that we have been bombarded with by the media.  However, Dateline gave a good explanation as to how it all started and how we got here.

What is amazing about the show is how people were getting mortgage loans that they clearly couldn’t afford.  The entire system got so corrupted from the banks, brokers, Wall Street,  ratings agencies to even the borrowers that everyone was just looking to make money and ignored the fact the borrower would not be able to pay back the money.   Isn’t that absolutely crazy?

As an example, one borrower was able to get a $260,000 loan with a monthly payment of $2,100 but the borrower had an income of $1,600.  Clearly, people lied to get these loans approved.  In my opinion many people should be sent to prison over the current mortgage crisis.

Video: Inside the Financial Crisis: Mortgage Madness

Visit msnbc.msn.com to view the rest of the Morgage Madness.

With today’s high cost of college, finding a scholarship can really help reduce your expenses.  One great way to find scholarship is to use FastWeb. 

FastWeb also helps students choose a college, pay for college, find jobs and internships; best of all, it’s free.  Since the site launched in 1995, 34 million students have created FastWeb accounts and last year, 1 out of 3 college-bound high school seniors used the site.

When registering to use the site, each FastWeb user must answer a detailed questionnaire about them. The site then uses this data to generate personalized information of scholarships, colleges, internships, jobs, and more.

FastWeb’s scholarship database has the most comprehensive and accurate compilation of national, community, and college-specific scholarships available anywhere. The database is updated continuously by the company’s research team. FastWeb’s database contains more than 1.3 million scholarships worth over $3 billion.  All this for free!

For more information visit FastWeb.com.

If you watch the financial market one invest vehicle we always hear of is “derivative”.  So what’s a derivative? A derivative is a security whose price is dependent upon or derived from one or more underlying assets.

A derivative itself is a contract between two or more parties and its value is determined by fluctuations in the underlying asset, which include stocks, bonds, commodities, currencies, interest rates, forward contracts, options, and market indexes. Derivatives are mostly characterized by high leverage.

Derivatives are normally used to hedge risk, however, can also be used for speculative purposes. As an example, a Japanese investor who purchases shares of an American company off of an American exchange with U.S. dollars will be exposed to exchange-rate risk while holding that stock.

To hedge the exchange-rate risk, the investor purchases currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Yen (Japanese currency).

Related Article:  What is a Hedge Fund?

Below is a list of U.S. banks that have failed since the beginning of this year (2009).

Most of the banks listed were acquired by other banks.  The cost to the Deposit Insurance Fund (DIF), where the FDIC promises to reimburse customers (now $250,000 per account) is listed in the right column.  This list is expected to grow a lot longer before the end of the year!

See Video: How the FDIC Takes Over a Failed Bank

Hedge funds are private investments that use various nontraditional investing strategies to try to offset investment risk, an approach known as “hedging”. Hedge funds are attractive to investors because they can provide consistent returns even in a bad market.

Hedge Funds vs. Mutual Funds

Unlike a mutual fund, hedge funds are managed more aggressively and can take speculative positions in derivative securities such as options, shorting selling stocks and other relatively obscure or sophisticated vehicles.  As a result, hedge funds can make money when the market is falling.  Mutual funds, on the other hand, cannot take highly leveraged positions and are typically safer and rely on the market going up to make money. 

Additionally, the SEC (Securities and Exchange Commission) doesn’t have strict rules for hedge funds as with traditional mutual funds.  Hedge fund managers can manage the fund and create portfolios any way they want and do not have to provide information about performance or holdings.  Additionally, there are no rules about pricing, so investors may not be able to determine the value of their investment at any particular time.  As a result, there is really no way to tell the risk level of a particular hedge fund. 

Hedge Fund Requirements

Hedge funds typical require a minimum investment of $1 million; however, there are “lite” hedge funds that are more affordable.  Not everyone qualifies to invest in hedge funds.  According to SEC guidelines, hedge fund investors must be “accredited”, which means you must have a net worth of at least $1 million.  Additionally, you must have an individual income of at least $200,000 for the past 2 years or you and spouse must have a joint income of at least $300,000 for the past 2 years.

Downside to Hedge Funds

Hedge fund fees are much higher than traditional mutual funds, typically charging 1% or 2% of assets plus 20% of profits, which kicks in after a certain threshold.

Because hedge fund managers typically buy and sell frequently so investors will incur higher short term capital gain taxes.  Hedge funds are better suited for retirement accounts where tax consequences don’t matter. 

Another limitation of hedge funds is the lack of liquidity.  Your money may be locked up for up to 5 years, although it’s typically 1 year.  After you must provide 45 days notice if you want to make any withdrawals and you maybe limited to the amount of times you can make withdrawals.  Some hedge funds only allow you to make a withdrawal only once per month.

Fore more information about hedge funds visit:

• HedgeWorld
• Van Hedge Fund Advisors International
• Hedge Fund Association
• Hedge Fund for Dummies (book at Amazon.com)

A few days ago I posted an article about why I never thought about creating Word Combination Locks.  Today I’m wondering why I never thought about dry-erase paint created by IdeaPaint.

IdeaPaint sells a paint that with a single-coat roller-applied makes any smooth surface into a dry-erase writing surface. What a neat idea! 

The paint is much cheaper than purchasing a dry erase board.  The paint cost $3.99 per sq. ft. and can be purchased at IdeaPaint’s website.  The paint can be used in conference rooms, creative spaces, classrooms, home offices, kid’s rooms, and playrooms.

IdeaPaint is environmentally friendly, which makes significant improvements in raw material utilization, energy consumption, and air quality.  See video below of IdeaPaint at Neocon.

For more information visit IdeaPaint.com.

Related Article:  Why Didn’t I think of This? – Word Combination Locks

Video: Neocon Idea Paint