Subprime Mortgages
Generally, subprime mortgages are designed for people with poor credit. Most credit scores range from 300 to 850. Most consumers fall in the 600 to 700 range. If a borrower’s score falls below 620, that’s subprime territory.
Higher Interest Rates
Borrower’s pay higher interest rates for subprime mortgages. This “risk based pricing” lenders use to come up with a rate will be based on the following:
- Credit scores
- Size of down payment
- Types of past delinquencies (Late pays on mortgages or rent are worse than credit card late pays.)
Characteristics of Subprime Mortgages
In addition to higher interest rates, following are what borrower’s might see with subprime loans:
- Prepayment penalties
- A balloon payment (usually due at the end of five years)
Types of Subprime Mortgages
Several subprime mortgage structures are available: The most common is the adjustable rate mortgage (ARM). This loan has a fixed interest rate in the beginning of the loan. After a few years it converts to a floating rate based on an index.
This means that the rate increases from the lower initial fixed rate. It can result in significantly higher mortgage payments that borrower’s may struggle to meet.
One thing to watch out for with subprime loans is predatory lenders. These lenders take advantage of naïve or desperate borrower’s and charge them outrageous fees and interest rates for their loans.
Steve Wyrostek -HomeLoans.org Expert A 20 year plus veteran of the insurance industry, Steve managed departments in the personal and commercial lines areas of major insurers. He’s familiar with how insurance—ranging from boat to workers compensation—works.
