The Many Kinds of Subprime Mortgages

Subprime Mortgages
Subprime mortgage loans have been accessible by borrowers with credit problems at a rate higher than A-paper loans due to the increased risk. Subprime borrowers in general have damaged credit histories that commonly may include such derogatory information on their credit record such as payment delinquencies, charge-offs, judgments, and bankruptcies. They may also exhibit poor repayment capability as measured by credit scores, debt-to-income ratios and/or other criteria that may include borrowers with imperfect credit records.

Subprime Mortgages and the Subprime Borrower
Subprime mortgages are loaned to borrowers who are incapable of qualifying according to traditional, strict criteria due to a flawed credit history with limited income or possess FICO credit scores which are below 620 based on a scale that ranges from 300 to 850. Borrowers with Subprime mortgages encompass a higher risk of default, however, than borrowers who have prime mortgage loans that are priced based on the risk assumed by the lender.

Most mortgage home loans do not fall into the category of a Subprime mortgage, however, Subprime mortgages began to be very popular in the early part of the 21st Century. Approximately 21 percent of all mortgage loan originations from 2004 through 2006 were Subprime mortgages. Subprime mortgages summed to $600 billion in 2006 which accounted for about one-fifth of the U.S. mortgage loan marketplace.

Subprime Mortgage Choices

There are many different kinds of Subprime mortgages which include:

Interest-only mortgages, allowing borrowers to pay only interest for a period of time (usually 5–10 years);

"Pick a payment" loans, allowing borrowers choose their monthly payment (full payment, interest only, or a bare minimum payment which may be lower than the payment required to reduce the balance of the loan); and

Initial fixed rate mortgages that quickly switch to variable rates.

This last class of mortgages has grown very popular among Subprime mortgage choices since the 1990s. Common lending mediums within this group include the "2-28 loan". This loan proposes an initial low interest rate that stays fixed for two years after which the loan resets to a higher adjustable rate for the outstanding life of the loan which is for 28 years. The latest interest rate is in general set at a margin over an index, for instance, 5% over a 12-month LIBOR. There are variations to the "2-28" loan which include the "3-27" loan and the "5-25" loan.