What Is a Subprime Home Loan?
Credit scores affect a borrower's ability to secure credit and take out loans, as well as the interest rates they will get on their loans. Subprime home loans began drawing much attention from the media after they played a major role in the crisis that struck the nation's financial system.
Other People Are Reading
-
Credit Ratings
-
Credit ratings are on a scale from 300 to 850. Those with credit ratings above 700 receive the best interest rates on loans, whether for a car, house or credit card.
Subprime Borrowers
-
Those with credit scores below 620 are still offered loans but at substantially higher interest rates. Prior to the subprime crisis, most lenders would classify these borrowers as "subprime." That is, they had a higher likelihood of defaulting on their loans. Now, however, subprime borrowers are seen having scores as high as 670, depending on the type of loan.
-
Subprime Home Loans
-
Subprime home loans are given to borrowers who do not qualify for prime rates. These loans have interest rates roughly 2% higher than standard loans. When uncertain about a borrower's ability to pay back the loan, lenders can tack on extra fees.
Adjustable-Rate Mortgagaes
-
Adjustable-rate mortgages are associated with subprime borrowing. With an ARM, the borrower pays an initial low interest rate on the loan. Then, after a set period of time, anywhere from three to six years or more, the rate resets, often at a higher figure. As many as 80% of subprime home loans in the U.S. within the past decade were ARMs.
Mortgage Crisis and Refinancing
-
After their initial interest rates reset higher, subprime borrowers are forced to make higher mortgage payments. Those who are unable to pay may default on their loans. During the housing crisis, some homeowners, unable to meet their mortgage payments, have refinanced their fixed-rate mortgage into a subprime ARM loan in hopes of saving their home. But many have still defaulted on their mortgage after the interest rate went up.
-
