The subprime lender specializes in making mortgage loans to people with a poor or bad credit history, who have no down payment, or who have problems proving their income. Due to the higher risk these borrowers carry to the lender, the interest rates that the lender offers will be higher than traditional market rates.
The interest rates that are charged for a subprime mortgage can vary to great degree. Based on the borrower's credit history and how bad it is, the rate can range from slightly above the normal market to 0.1% to 0.6% higher than the prime rate. Even though the additional percentage may seem small, for non- subprime loan mortgages and other large non- subprime loans, a subprime loan translates to thousands of dollars worth of additional interest payments.
In addition, the loan is attached with less ideal terms and higher fees involved with procuring the loan. Therefore, it results in an annual percentage rate (APR) far greater than a conventional mortgage.
If a subprime loan is more expensive, why should it be more attractive to you? These are the top three reasons as to why you should obtain this loan: (1) Subprime home loans are usually short term, ranging from 2-5 years, allowing a refinance at a lower interest rate and obtaining a non-subprime loan when the borrower's credit improves. (2) Borrowers can obtain cash out, which can be used to pay off credit cards and other past due or high balance accounts on his credit report. (3) Subprime home loans can allow new homebuyers to purchase their first home at today's market prices before establishing excellent credit.
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