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What is a subprime mortgage

what is a subprime mortgage


"Subprime" mortgages are those loans given to people with weak credit or an inability to properly document their income, or both, often with low downpayments, or used as consolidation loans when refinancing.

They are good, to a degree, in that they do serve a useful purpose in allowing more people access to home financing.

Bad, however, is the fact that most of them are done with short-term teaser rates. Most common is an adjustable-rate loan that has a low fixed rate for 2-3 years. The rates can jump substantially after that, increasing your monthly payments by 50% or more overnight in some cases.

Also bad, is that most subprime loans are sold with prepayment penalties. So, if you are even eligible to refinance into a prime loan, it can potentially cost you thousands of extra dollars when

you pay off the loan early, usually within the same 2-3 year period.

They can be useful sometimes to help someone consolidate debt and reduce payments, especially if they've had trouble in the recent past that can be fixed by paying off collections or other debts and getting your credit cleaned up. As long as you can refinance quickly before the rate adjustment and payment hike wipe you out, it's not bad, and can actually help some people get their financial lives back on track.

Overall, most people should do their best to avoid them if at all possible. There's a reason that almost 1 in 5 subprime loans written in the last 2-3 years are behind on their payments. High risk, high rates, and given to people who can barely afford them.

Source(s): 10 years in mortgage banking

Category: Credit

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