What is a Subprime Mortgage?

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There are a lot of different mortgage products on the market, but determining which is best isn’t always easy. The various types of mortgages can seem confusing at first, but a prime and subprime mortgage are easy to understand. They both serve a different purpose, but the subprime option might be the best way to get your foot in the door to a home mortgage.

What Does Subprime Mean?

A prime loan or mortgage is one that offers interest rates that are in line with industry standards. This means that a subprime mortgage is one that often substantially veers from the norm on interest rate amounts. It’s not always immediately visible, since it can be an interest rate that changes, or adjusts after a period of time. They are normally taken out by borrowers with credit issues, so the justification lies within the risk taken by the lender.

Types of Subprime Mortgages

The two most common types of subprime mortgages are the adjustable rate mortgage (ARM) and a balloon note. The ARM is attractive to a lot of borrowers because of the normally low initial interest rate. It beats the competition many times. The danger is in staying in the loan too long. At some point, generally two years, the interest rates will adjust, but usually not in the best interest of the borrower. The rise in interest rates can be quite dramatic. It is one of the reasons the housing market took such a deep hit in 2008. A balloon note is one in which the interest rates might be reasonable, but there is a payment at the end of the loan period that is extraordinarily high.

Purpose of a Subprime Mortgage

Subprime loans are designed to help people get a mortgage that have bad credit and payment history. The whole point to getting a subprime mortgage is that you can take advantage of the low interest rate, create a good payment history and then refinance the loan. This will hopefully move you up into a prime mortgage loan and earn the lenders some refinance fees. It’s created to be a win-win scenario for everyone. The problem is that if you get locked into the ARM and don’t improve your credit standing, you could be in for a wild ride of high interest payments. It leaves you at higher risk of foreclosure.

Is a Subprime Mortgage the Best Choice for You?

A sub-prime mortgage might be the solution for you if you can get in and get out quick. It’s an easier way to secure a home mortgage if you have less than perfect credit. When used as designed they can be helpful to boosting credit ratings and worthiness. Before embarking on an ARM or balloon mortgage, you need to be very clear about the time you have to get refinanced into a prime mortgage. Careful planning can make it a very useful tool.

Being able to secure a home mortgage is something many people look forward to for years. Issues with credit aren’t always the end of your chance to purchase the home you want and need. A subprime mortgage can give you the ability to get into a home and work on slight credit problems that will eventually get you on better footing towards a traditional prime mortgage.

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