The Ups And Downs Of Subprime Mortgages
Subprime mortgages were designed to help people with poor credit buy their own homes
. Normally, a home owner may be offered a prime mortgage but it requires the borrower to have good credit ratings and to make a substantial down payment. In contrast, only a small down payment is required of borrowers with bad credit. The mortgage for people with bad credit became all the rage in the mid 90s and early 2000s with the assumption that housing prices would continue to rise. Subprime loans may be considered as riskier than a prime loan and that is why they often come with high, adjustable interest rates. Generally the introductory interest rate is often low to entice new clients but the low rate may only be applicable for the first two years before the adjustment period when the rate may be increased.
Applicants or borrowers of
subprime mortgages may be known as subprime borrowers. Generally they are people with a credit score of less than 620. If you were to apply for a prime mortgage you may be required to have a steady income, good credit history and an amount of cash for a down payment. Due to the fact that not all homebuyers may have all these qualifications, subprime loans were created to help such buyers. The interest rate on a subprime mortgage is generally higher than that on a conventional mortgage. Other costs such as pre-payment penalty may also be imposed, thus making the borrower having to pay more in the long run as opposed to taking a conventional loan.
Before applying for a
subprime mortgage, you may want to improve your credit score first even though the mortgage is designed to help those with poor credit scores. The reason is that previously you may have been able to get a subprime loan with a credit score below 620 but since the recent housing crisis, lenders are becoming more cautious and may not approve subprime loans for people with a score below 600. So the ideal way might be to raise your scores as close as you can to 700. You may do that by paying down the balance due on your credit cards and not applying for other loans or accumulating new debts along the way. It may also be a good idea for you to check your credit report for errors that might lower your score.
If your credit score is low, you may have to cough up a substantial amount of cash to put as your down payment. Subprime lenders may get more confident if you are able to put in more of your own cash into the property you are buying. You might also want to assess your financial situation and decide which subprime loan may work best to your advantage. You might be aware that many subprime lenders offer an adjustable rate mortgage (ARM) with a considerably low introductory interest rate. You may need to bear in mind that the rate usually lasts up to only three years and may later be adjusted every six or twelve months. So you might want to compare rates and terms from different subprime lenders so you may at least have the options of getting the best deals for you and your family.
Prime borrowers may generally be allowed to refinance their mortgage some time during the term of their loan. However,
subprime mortgage refinance might not be an option unless you have accumulated strong credit history over the years and are able to show your creditors that you are responsible with your loans.
In general, subprime lenders may offer an alternative solution to promoting more home buyers but you may want to be careful and plan your way through the life of your loan especially if you are on an adjustable rate mortgage program with the interest rate fluctuating over the years.
by: Ask Bill
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