Owning a home has been a long-cherished dream for most American families. But during the first decade of 2000s, the real estate in the United States witnessed a dramatic boom and burn. One of the main factors for the crash was the overuse of the tricky lending program of subprime mortgage. Subprime lenders strongly felt the pain in the year of 2007. What is a subprime mortgage and how does it work? Read the page below and you’ll have a better understanding of subprime mortgages.

Definition

Subprime mortgage means providing loans for borrowers with lower credit ratings. Borrowers with lowered or imperfect credit ratings are not qualified for a conventional mortgage since they are likely to have a larger-than-average risk of defaulting on the loan. In the Unite States, borrowers with a FICO score below 640 can get subprime mortgage loans. During the subprime mortgage crisis of 2007, the term was popularly used by the media.

Interest Rates on Subprime Mortgages

Because of the higher risk, lenders usually charge a higher interest rate for subprime mortgages than a conventional mortgage. But the rates vary greatly. A variety of risk-based factors determine the interest rates for subprime mortgages, including credit scores, size of down payment, type and number of delinquencies etc.

Kinds of Subprime Mortgage Structures

There’re several different kinds of subprime mortgage structures currently. The most common type is the adjustable rate mortgage. This type of mortgage charges a fixed interest rate in the first 2 or 3 years. Then it will convert to a floating rate according to current market rates. It’s a good option to avoid high initial mortgage payments. But with a potential adjustment of 2% each year, it can be costing much more in the end. Some other types of subprime mortgages are also available. The major difference lies in the calculation of interest.

Pros and Cons

Compared with standard home loans, subprime mortgage makes it possible for people with poor credit to get a mortgage and own a home. When the person has improved his credit score, it’s possible to get a lower interest rate and even refinance the house to pay off other debts. A subprime mortgage is offered at a price of a higher interest rate.

A major con for subprime mortgage lending is higher possibilities of defaulting. It means that borrowers are more likely to fail to make payments on these loans. The sharp rise in subprime mortgage delinquencies and foreclosures has dramatic influences on the country’s housing bust and overall economy. The notorious U.S. subprime mortgage crisis features a sharp rise in foreclosures and delinquencies of subprime mortgage.

Choose the Best Subprime Mortgage Lender

There’re so many subprime mortgage lenders around. Choosing the best one requires some tactic. Speak with a broker and he/she can always help you find the best products on the market for your needs. Their good working relationship with various lenders can be an advantage. It’s worthy to pay some extra fee.

If you’re trying to arrange a subprime mortgage by yourself, be sure to check out both the lender and the product. Negotiate for the best possible interest rate and read the repayment terms carefully. Another good option for people with low credit scores is to wait for some time and build up scores. Then they’re probably eligible for a prime mortgage.