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Subprime mortgages disappeared shortly after the Great Recession started in late 2007, largely because they were blamed for the downturn’s wide-reaching impact. Now, subprime mortgages are returning, although some lenders call them “non-prime.”
While some people believe this will lead to another economic catastrophe, subprime mortgages do have their benefits. You can decide whether they are right for you by learning the pros and cons.
Lenders became very strict after the recession. Today, some of them won’t even offer mortgages to borrowers who have credit scores under 680. That can make it difficult for people to buy homes, which means they continue wasting money on rent for the foreseeable future. The return of subprime offers means that home buying may get easier for people with less-than-perfect credit.
Lenders see subprime borrowers as risky investments, so they offset that risk by charging higher interest. While someone with a great credit score may qualify for an interest rate under 4 percent, a person with subprime credit can expect to pay 8 to 10 percent.
A higher interest rate makes a big difference. If you use a 30-year mortgage with a 4 percent interest rate to borrow $100,000, you’ll repay a total $171,870. If you get a 10 percent interest rate, though, you’ll pay a total $315,926.
Plenty of people who want to buy homes don’t currently qualify for loans. This slows the housing industry, which can also harm employment and other important economic factors. By introducing subprime mortgages, more people will qualify for loans that help them buy houses. This could have a positive effect on the community.
Many subprime loans come with variable interest rates that can change over time. Just because you start with an affordable 4 percent rate doesn’t mean you won’t pay 10 percent or more next year. This volatility makes it nearly impossible to know if you can afford the mortgage. With so much uncertainty, you can’t make informed financial decisions for the future. Subprime mortgages can be risky, so before signing on that dotted line consider building your credit score so you will qualify for a fixed interest loan.
Subprime loans certainly have their problems, but they are the only option for some home buyers. Before you accept one, you should go over every detail to make sure you understand the risks. If you are ready to take on a mortgage, shop around for rates. Lenders tend to differ in what they offer. Start looking for the best rates at sites like Lending Tree.