Avoid Sub Prime Mortgages - They will hurt you in the long run

Sub-Prime Mortgages are loans given to borrowers who have a have poor credit histories including payment delinquencies, judgments, charge-offs and bankruptcies. The borrower’s credit scores also would be very low with high debt: income ratios. Sub-prime mortgage loans are an alternative way to acquire ownership of house if a person has a poor credit. They also are a chance for the person to build your credit score. If you are considering to owning a new home and have bad credit, sub-prime mortgages are the way to go.

Subprime lenders are those who sanction mortgage loans to those people who are rated to be unfavourable by the traditional mortgage companies.

Sub-prime lenders give mortgages, however, at higher interest rates as compared to rates of other lenders. For a 30-year term, a sub-prime mortgage loan is offered at an interest rate, which is 4% higher than average home loan, and it means it can burden the homeowner additionally by $300 per month, which translates to $100,000 over the entire period of a 30-year mortgage.

There are some types of subprime loans called the no-documentation loans or the stated-income loans and these are financed at still higher interest rates, sometimes many points over and above the traditional loans.

Additionally subprime loan lenders also take advantage of unsuspecting borrowers by levying a pre-payment penalty on the loan that is unreasonable and not fair to the borrower, based on their qualifications. Typically it will have a 6-month to a 2-year pre-payment penalty. There are occasions when a subprime lender offering a loan with a 3 year or higher pre-payment penalty.

Subprime lenders use tactics of advertising unrealistic and deceptively low price offers to trap the borrowers. There are some lenders who fail to mention some fees until closing. There are a few who take advantage of changing interest rates. If mortgage rates drop before the loan rate is locked, the lender should decrease the quoted rate. But lenders retain the higher rate that would benefit him.

Homeowners should do the following:

Understand the current loan terminology. Be clear of what type of loan do you have? When will the loan adjust? Whether there are any prepayment penalties, etc.

Make plans to refinance your loan into a fixed rate mortgage loan or even a long-term adjustable loan which offers at least 10 years of fixed monthly payments.

Do not hang in till your house in foreclosure. Waiting can quickly become a foreclosure or result in a bankruptcy situation. Do your diligence and look for a refinance loan with a trustworthy lender.

Sell away, if you may have to. Do not let your credit get ruined with a foreclosure or a bankruptcy. Sell the mortgaged house and relocate into a smaller home, if you cannot afford your mortgage.

Subprime lenders have given home ownership to many people who would not have otherwise owned one, but they also contributed to rising home foreclosures in United States. A strong link between was established between rising foreclosures (data between 2001 and 2006 analyzed) and subprime mortgage lending. Therefore individuals looking to buy their first home should go with caution especially if using a subprime lender. Subprime lenders play many tricks and caution is to be exercised by the buyers. Many borrowers fall prey to the subprime lender schemes.