Subprime loans face big hikes: Borrowers with poor credit ratings may see rates jump to 10 percent or more

The Christian Science Monitor reports:

Over the next several months, banks will be changing the "teaser rates" that homeowners received two years ago.

The peak for resetting loans will be in October, when the rates on some $50 billion worth of mortgages are likely to rise by 2 percentage points or more. This could mean a rise of several hundred dollars a month for many borrowers.

For example, on a $210,000 loan balance (the average subprime amount in 2006), the additional 2.5 percentage point increase on the interest rate adds about $4,560 a year, or about $380 a month, estimates James Kragenbring, senior investment officer at Advantus Capital Management in St. Paul, Minn.

That means the median household would have to devote an extra 9.5 percent of income just to pay the extra interest.

"Given the debt-to-income ratio of the typical subprime borrower at the time they received their loan, it is unclear where the extra cash flow will come from," says Mr. Kragenbring.

October could be shape up to be one unforgettable month.