There is an abundance of unfamiliar terminology involving the current mortgage crisis, and a lot of confusion and opinions as to how we got where we are today. 

Subprime Loans:  Riskier loans were made at higher interest rates. These loans were desired by both banks and Wall Street as the higher interest rates offered investors a higher yield.
Problem:  Obviously the higher interest rate and fees did not offset the risk, as evidenced by today’s mortgage crisis.
 



Alt-A loans: Alternative underwriting, no income or asset (down payment) verification.  Loans with higher interest rates were made to borrowers based on their stated income. 
Problem:  Obviously the higher interest rate and fees did not offset the risk, as evidenced by today’s mortgage crisis.

Option Arms: An adjustable loan with the option of several possible payment options:
*Minimum Payment: Paying only the minimum will not be sufficient to pay all of the interest; the deferred interest will be added to the loan amount (principal balance) resulting in negative amortization.  The loan amount increases rather than decreases. After approximately three years, the loan is recast and the payment resets in order of fully amortize (pay down the loan).
Problem:  After the monthly payment is adjusted (recast) most homeowner’s are not able to afford the increased payments.

*Interest-Only Payment: The interest-only payment option, avoids deferred interest. This payment option will not amortize the loan (reduce the principal balance). 
Problem:  Interest only payments will never pay off the loan.


*Fully Amortizing Payment: Pays principal and interest – (the old fashioned plan).