What is a subprime mortgage?
Most subprime loans are short-term, adjustable rate mortgages (ARMs). Those loans have an initial “teaser” interest rate that lasts 1-3 years and then adjusts every 6-12 months for the remainder of the life of the loan; the interest rates never reset lower than the initial teaser rate. Many borrowers obtained subprime loans either because they had previous credit issues and could not qualify for another loan, or wanted to qualify for a larger or more expensive home than they would be allowed with a non-subprime loan. In some cases borrowers who overstated their actual income were able to purchase a home beyond what they would be able to afford through a subprime loan.
A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate. There are several different kinds of subprime mortgage structures available. The most common is the adjustable rate mortgage (ARM), which initially charges a fixed interest rate, and then convert to a floating rate based on an index such as LIBOR, plus a margin. The better known types of ARMs include 3/27 and 2/28 ARMs. ARMs are somewhat misleading to subprime borrowers in that the borrowers initially pay a lower interest rate. When their mortgages reset to the higher, variable rate, mortgage payments increase significantly. This is one of the factors that lead to the sharp increase in the number of subprime mortgage foreclosures in August of
A subprime mortgage is a loan for the purpose of purchasing a home, specifically for borrowers who do not meet the criteria for a standard mortgage. Subprime is a description of the creditor, and is an indicator of poor credit ratings, usually 600 and below. Prime customers describe borrowers with a credit rating of 700 and up. Due to the higher risk with borrowers who have low credit scores, mortgage lenders charge higher interest rates on a subprime mortgage than on a standard mortgage. Although there is competition within this industry, the rates are consistently higher than those available from traditional financing. Within the subprime mortgage industry, there are two product lines that are unique to this market; adjustable rate mortgages and 100% financing. An adjustable rate mortgage is one where the initial interest rate is close to prime for a set period of time. After that time, the rate increases for the remainder of the mortgage life. The options are 2/28 — two years at an
A subprime mortgage is a mortgage granted to a borrower who is considered subprime, that is, a person with a less than perfect credit report. Subprime borrowers have missed payments on a debt or have been late with payments. Lenders charge a higher interest rate to compensate for potential losses from customers who may run into trouble or default.
A subprime mortgage is a mortgage granted to a borrower who is considered subprime-that is, a person with a less-than-perfect credit report. Subprime borrowers have missed payments on a debt or have been late with payments. Lenders charge a higher interest rate to compensate for potential losses from customers who may run into trouble or default.
