Home Loans

What is a sub-prime home loan?

A sub-prime mortgage can be defined as a loan taken out at a higher interest rate than normal. Many financial institutions online use this method of lending such as Fannie Mae, Country Wide, Lending Tree and others just to name three top online lenders. These loans are not typical your best loans and most lending organizations don’t do them because of the high risk associated with it such as foreclosures.

“The Mortgage Bankers Association says a record-high proportion of homeowners with a mortgage - 0.54% - faced foreclosure proceedings at the end of last year. And about 13% of sub-prime borrowers were behind on payments” (www.usatoday.com).

What are the benefits of a sub-prime mortgage?

The benefits associated with owning a home through a sub-prime loan are high. The people who receive these loans fall into the category of having bad credit or a low credit score of 600 or lower. Typically someone who would qualify for these loans have payment issues such as charge-offs, judgments, and bankruptcies on there credit report.


For many of these first time home buyers it is a great accomplishment because it is the beginning of building wealth and for many a chance to start over. However, a first time home buyer with bad credit receives the shock of their life with a sub-prime mortgage loan because over a period of time he or she may face the chance of not being able to pay their mortgage due to a higher interest rate. It is very important to read the fine print or the mortgage agreement terms before signing it. The terms in a mortgage agreement for a sub-prime mortgage can be a bit demanding, so it is advisable to get someone who understands sub-prime mortgages to explain the terms in detail to you before signing the agreement.

Advantages and Disadvantages of High Interest Home Loans

The Advantages of a sub-prime mortgages are great for individuals with bad credit. It is an opportunity for them to become first time home owners. That also helps an individual to use it to repair their credit. If the person maintains a good payment record, they should be able to refinance their mortgage to a better rate. In the UK, most sub-prime mortgages have a two or three-year tie-in, and borrowers may face additional charges for replacing their mortgages before the tie-in has expired (www.encyclopedia.com).

The Disadvantages of a sub-prime mortgage are basically that you get a higher interest rate than normal and there are increased fees as well as associated with it. There are also hidden cost associated with this type of lending. It would be advisable to wait till your credit is better to be qualified for a an alternative type of mortgage.