Subprime mortgages are for customers who don't qualify for a conventional mortgage. Normally, they are lacking in some of the fundamental areas of the credit granting criteria. Some of the conditions concerning the terms and agreements are harsh, causing the borrower often to experience hardship.
Credit Score
A subprime mortgage is for customers who have credit scores of 600 or less. Most likely, they have made late payments to their creditors, which has lowered their score.
Interest Rates
If you receive a subprime mortgage, you are considered a riskier customer, so lenders will give you a higher interest rate.
ARM
Most of the subprime mortgages have adjustable rate mortgages, (ARM), which eventually reset to a higher rate of interest. ARMs start out fixed with a low rate of interest and affordable payments, but after the reset, the payments increase and often become unaffordable.
Refinancing
Subprime mortgages were designed for customers to refinance before the rate increases. Refinancing, however, is often difficult to achieve.
Prepay Penalty
Subprime mortgages often have prepayment penalties. When a borrower is ready to refinance or sell, they are then subjected to a penalty.
Balloon Payment
Another characteristic of a subprime mortgage is the balloon payment. The subprime mortgage is usually amortized over a certain period of time; then the borrower must refinance, sell the home or pay off the balloon payment (the entire balance).
