Exploring the Sub prime Mortgage

From the Superpages.com

For buyers with poor credit histories (having a rating of 600 or less) a subprime mortgage is available from some lenders. Because the poor credit rating poses significant risk to lending institutions, subprime mortgages often assess interest rates well above the prime lending rate.

Subprime mortgage structure

In most cases, these loans are structured as adjustable, or variable, rate mortgages (ARM). This type of loan charges an initial interest that is reset at certain predetermined intervals to match the prevalent economic conditions. Depending on those conditions, the interest rate may either increase or decrease.

ARMs for these loans are designed to reset after either two or three years, depending on the contract. The rate is based on the prime lending rate with other fees, rates, and risk factors included.

Lending institutions

Subprime lenders may either be independent or affiliated with typical lending institutions. The best way to identify subprime lenders is to look at their rates, which are significantly higher than traditional institutions.

Advantages

One advantage to a subprime loan is that it makes home ownership available to those who are not able to qualify for conventional mortgages. Also, insurance and tax escrow is not required, which may provide some relief on monthly payments. However, these items must still be paid for.

The way that subprime mortgages are structured can also be a benefit to the borrower. The initial fixed rate time period gives the borrower an opportunity to build the credit score back up. If successful in this endeavor, the buyer may then be able to refinance the loan under more conventional terms.

Problems

The circumstances associated with subprime loans and their borrowers creates and difficult and risky situation. The low credit rating of the borrower is an indicator that financial issues exist; add that to the fact that subprime loans tend to reset higher, with accompanying increases in monthly payments, and there is a formula for disaster. The default and foreclosure rate on subprime loans is exceptional

If you are considering buying a home, there are many ways to finance this purchase, and many programs available to help. The best way to accomplish your goal is to speak with several lenders. With their guidance, you will be able to get an exceptionally clear picture of your financial situation, and where you stand in relation to your goal.