What is a subprime mortgage? Well … subprime mortgages are for homebuyers with poor or limited credit histories. Typically, this is anyone with a credit score under 620. They’re also often the only type of loan available for people with good credit scores who have a high loan-to-income ratio, or can’t provide proof of their income. As a result, subprime mortgages usually come with higher interest rates than other home loans to account for the lender’s higher risk.
Here are several key attributes common to many subprime mortgages:
Adjustable rates
Many subprime home loans are adjustable rate mortgages (ARMs) that offer a low introductory rate that can last for several years before the modification date — usually to a higher level.
Interest-only options
Most subprime ARMs feature a period of time where all of the mortgage payments are dedicated to paying the interest only — not the principal.
Prepayment penalties
Those who want to retire their subprime loan early are usually forced to pay extra fees.
Balloon payments
Some subprime loans require the borrower to pay-off their entire loan after the introductory period expires. This can be a real problem for borrowers. Especially those who are unable to refinance for any reason before the introductory period ends.
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Readers: This is article 22 of 25 from my no-nonsense “Mortgage Basics” quick-reference series.
Photo Credit: GotCredit
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