What is a Subprime Mortgage?

If your credit history stops you from getting a conventional loan, you may consider a subprime mortgage. However, before you make that commitment, scroll down and check out how a subprime mortgage works and whether it’s right for you.

 

Subprime Mortgage

A subprime mortgage is a housing loan offered to people with a bad credit history and was designed to allow the American Dream of homeownership to become a reality. If you took out bankruptcy last year, have low income or a long history of not paying your bills, you can still qualify for a subprime mortgage.

 

How Subprime Mortgages Work

Just like a conventional mortgage works through a lender, such as a mortgage company or bank, a subprime loan works the same way. The most significant difference between a traditional and subprime mortgage is the interest rate. Since a subprime mortgage borrower poses a greater threat to the lender, you will be charged a higher interest rate per month. Note that this means you will pay more for your house with a subprime loan than with a conventional one.

 

Types of Subprime Mortgages

There are several types of subprime mortgages. The three most common ones are:

 

  • Interest-Only Mortgages – An interest-only mortgage requires you to pay only interest for a fixed amount of time, somewhere along with the loans of 5 and 10 years. Because you’re paying only interest, your monthly payments are much lower than with a conventional mortgage. But, this only works until the interest-only period ends. Once it ends, you pay interest and your loan balance. For example, if you take out a 15-year loan that stipulates a 5-year interest timeframe, this means you have only ten years to pay both interest and the whole loan balance.
  • Balloon Loans – A balloon loan works just as a balloon does—starts with a tiny width and then expands slowly as you breathe into it, then stretches to its full size. When you take out a balloon loan, you start with minimum payments for an extended period. Making small payments means you owe more on your loan balance. Eventually, you make one huge payment to repay the entire loan.
  • Adjustable-Rate Mortgage (ARM) – An adjustable-rate mortgage is just that; it adjusts over time. With a conventional loan, the interest rate stays the same. ARMs change by a significant amount, sometimes, and always start with a “grace” period with a fixed interest rate. This is a teaser, but it won’t last but a few years to maybe ten years. During this time, you’ll be paying the same interest rate year after year. When the teaser ends, then your interest rate becomes variable. So, one year it could be low and the next high. This loan is the worst kind to get since you never know how high your interest rate will go and could find yourself not being able to afford your mortgage.

 

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Whether you’re looking for a new home with a conventional or subprime mortgage, contact us for a quick sale on your existing home. We buy houses in Oklahoma County and Tulsa, Oklahoma, with no fees, commissions, and more cash-in-hand. Contact us to learn how.

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