A subprime Mortgage is a type of loan granted to individuals with poor credit histories, who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate.There are several different kinds of subprime mortgage structures available.The most common is the adjustable rate mortgage (ARM), which initially charges a fixed interest rate, and then convert to a floating rate based on an index such as LIBOR plus a margin.
It is a classification of loans offered at rates greater than the prime rate to individuals who are unable qualify for prime rate loans.
Subprime Vs Prime
In addition to having higher interest rates than prime-rate loans, subprime loans often come with higher fees. And, unlike prime-rate loans, which are quite similar from lender to lender, subprime loans vary greatly. A process known as risk based pricing is used to calculate mortgage rates and terms - the worse your credit, the more expensive the loan.Subprime loans are usually used to finance mortgages.
