Sometimes life can throw you a curveball. Loss of a job, a personal illness, or a family emergency can catch you off guard and -- before you know it – you’re fighting to stay afloat and your credit score takes a hit. Consequently, some buyers might find it difficult to qualify for traditional mortgages and have turned to the subprime mortgage market for help.
The subprime mortgage market offers home loans to those with limited or blemished credit. This is a good deal for those who might not be able to obtain financing through conventional channels. Although the buyer’s loan costs are always higher than the typical market rate available through conventional financing, subprime mortgage programs can be a great vehicle for correcting past mistakes.
Typical subprime mortgage offerings carry a two to three year prepayment penalty in addition to their higher market rate. For those who live in an area of appreciating home values, the added costs of a subprime loan are offset by the increase in equity and home ownership opportunity. Some common mortgage programs include:
Interest-only loans: these allow borrowers to pay only the accruing interest over a period of time. The borrower typically has a balloon payment due at end of five to ten years.
Low payment, or “pick a payment” loans: these loan programs allow borrowers to make minimum payments during the early payback period. This type of loan can be very dangerous for borrowers because the low payment isn’t always enough to keep up with the interest charged.
The 2/28 ARM loan: this loan stays fixed for the first two years, then converts to an adjustable rate mortgage tied to a rate index for the final 28 years. In many cases the new adjustable rate is significantly higher than the original, fixed rate. Because of these higher rates, many borrowers seek ways to get out of the loan upon conversion.
In addition to the programs above, there are a number of subprime offerings that closely mirror today’s conventional loans. When evaluating subprime opportunities, it is always good to discuss the options with a trusted lender. The subprime is not your first choice, but its good to know its available should you need it.
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