It’s understandable why some feel a dark sense of foreboding, call it deja vu, when the topic of subprime mortgages crops up. They can really be dangerous mortgage products, if unchecked and as unregulated as they were before. But they can be pretty useful too if utilized prudently and responsibly.
Upsides of Subprime Mortgages
Subprime mortgages are relatively easier to obtain compared to other mortgages, say conventional loans. The latter is known for its rigorous underwriting and stellar credit requirements.
This ease may also be attributed to the fact that subprime loans are lenient to people with bad credit. Besides, lenders focus their attention more on the borrower’s ability to repay the loan.
A subprime mortgage is also useful to rebuild your credit. By making timely payments on your subprime loan and not missing any repayments, you are guiding your credit score up.
Lenders impose higher rates on subprime mortgages that reflect a higher risk of default on the loan. Relatedly, fees associated with subprime mortgages are higher. They could also include prepayment penalty fees, which are incurred when you effectively pay off the loan early through refinancing or selling the home.
What a borrower lacks in the credit department, the lender scrutinizes in the income department. With subprime loans, lenders lean towards stricter income verification: if you can afford the loan and have enough cash reserves or resources to make monthly payments. This could play out well for individuals who have large cash assets but lack the traditional documents to prove their income.
Points to Remember
It’s a given that subprime mortgages will be priced differently from their prime counterparts. Here’s what you can do to at least lessen the cost of opening one:
- Put a sizable down payment. A down payment of 20% can not only reduce your loan amount, it will help lower your rate. Moreover, you need not pay a private mortgage insurance if you put a 20% down payment. You can build equity faster this way.
- Pay off debt balances. Having too many debts appears to the lender that you are in financial trouble. Your credit score is the first to suffer from your high credit utilization. You better pay off your high balance credit cards in full and on time. Avoid missing any payment because a delinquency sends your score lower.
- Pay attention to your loan details. Take time to read your mortgage loan note. And, always ask questions whenever you don’t understand a clause. Being unaware of fees and charges could cost you.
- (Plan a) refinance. You can refinance your subprime loan to a lower rate. This will make the debt easier to repay and your monthly payment easier to manage.
Weigh your options carefully when you take out a subprime loan. Take into account its costs and benefits. And just because you are offered a certain rate, doesn’t mean you can’t shop and find rates that can be lower than what’s available.