In order to qualify for the standard mortgage, you must have a credit score around or above 700. If it is below that, you are considered a subprime borrower, and not attractive to banks. Subprime mortgage lending was a popular financial instrument in the heady lending days preceding the housing crash in 2007. Essentially, banks and lenders approved loans and mortgages to lenders with less than ideal credit and assumed a significant risk doing so.
2/28 subprime mortgages liable to suffocate many borrowers
A regular 15 year or 30 year fixed-rate mortgage has a locked in interest rate, and this interest rate is predicated on good credit. Subprime lenders and borrowers agreed to a ‘2/28’ mortgage, which had a fixed interest rate for the first two years. After the first two years, the mortgage switched to an ARM—Adjustable Rate Mortgage. With an ARM loan, a borrower was subject to a fluctuating interest rate. ARMs typically are capped off at 11%, but a borrower can still be crushed by higher monthly interest rates that wary widely, from 5%-11%.
Who is to blame here?
The practice of issuing loans at a subprime rate may sound nefarious, but it is done so at the risk of the borrower. Subprime mortgage lending makes it possible to loan to less-than-ideal borrowers. Unfortunately, many homeowners in subprime mortgages now owe more than the value of their homes because their houses are underwater.
If you are currently locked into a subprime rate and regularly make your payments, talk to your bank about switching to a fixed interest rate. It will save you a huge amount of money. Moreover, as the nation continues to face significant debt troubles, there are huge government backed programs to help homeowners ‘underwater’ to refinance a mortgage with their banks.