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What Is a Subprime Mortgage?

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Authored by Douglas Mefford in Mortgages
Published on 05-21-2009

For those individuals who have been plagued with financial difficulties that have given them bad marks on their credit ratings or income loans that would make it difficult to acquire a needed mortgage on their home, the system of the “subprime mortgage” has been created. In it’s most basic form, a subprime mortgage is a mortgage loan given at a higher than normal ultimate interest rate. This rate is higher than the national norm for standard mortgages.

From this basic idea, subprime mortgages can vary widely in their details and cost. Even those mortgage loans than begin with a lower interest rate will, once the initial interest rate period expires, will then be refinanced at a higher rate or put on an adjustable rate mortgage schedule. It is standard with a subprime mortgage that the individual’s monthly mortgage payments will increase. If the loan company raises the rate too high, however, they do risk driving the borrower into foreclosure and bankruptcy. While ultimately costing more, the use of a subprime mortgage is still preferable to not acquiring a mortgage loan at all and losing your property.

Loan agencies justify providing subprime mortgages by comparing the risk involved in loaning to a person who is a potential credit risk compared to the extra dividends they may reap through charging the higher interest rate on the loan. Some people claim that there is a bit of usury involved in subprime loans. This is due to the increasing qualification that rather than paying a subprime loan off more quickly and saving interest on the end of the loan, often it is expressly forbidden to pay off the subprime mortgage early. Since the loan agency feels they are risking more on the initial loan they feel it is their right to garner the full amount of interest charged.

The term “subprime” has gained a low reputation so the loan agencies will not actively use the term to describe their higher rate – higher risk loan programs. When seeking an initial mortgage, or ever refinancing one, be very careful to make sure you are not being offered a loan that will significantly raise your interest rate. Sometimes these variable rate loans can rise to as much as 50%. Beware of massive, and possibly unobtainable “balloon payment” at the end of the loan’s term. Such a thing could potentially set up the situation of losing your home to foreclosure almost as it has been paid off.

A subprime mortgage loan is not an entirely evil financial plan. By allowing subprime loans, there is an increased incidence of home ownership for people. It is estimated that subprime mortgage loans account for an average of nine million new homeowners every decade for the last twenty years. Home equity is a solid investment item and by owning one’s own home has that as an asset against hard times or sudden emergency financial needs. Remember, while there are more defaulted loans in the subprime category, they do allow many more people to experience the American Dream of owning their own home.

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