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Home Loans And Mortgages – Watch Out For Dangerous Subprime Loans
By: Charles Essmeier
With the growing interest in real estate purchasing and speculation, more and
more lenders are offering “nontraditional” types of mortgages. These include
adjustable rate mortgages (ARM) of every shape and size, the more popular
interest-only mortgage, and the very dangerous Option ARM mortgage, which can
cause the amount you owe to actually increase as time passes. One rapidly
growing sector of the lending market is the so-called “subprime” market, which
caters to consumers with poor credit records. The subprime market is a
profitable one, as lenders offer loans to consumers whose poor payment history
targets them as risky clients. Yes, they are risky clients, but the lenders
charge fees and interest rates that are high enough to offset the additional
risk. People who are interested in purchasing a home should be careful, however,
as many people who should qualify for traditional loans are being pushed into
higher-priced subprime loans instead.
The subprime market is quite a lucrative one for lenders, who are able to charge
higher fees and interest rates due to the increased risk posed by clients with
substandard credit histories. A subprime borrower might pay an interest rate
that is several percentage points higher than that of a traditional loan, and
the fees may include several additional “points” as administrative fees. A point
is one percent of the loan amount. This can add several thousand dollars to the
closing costs and tens of thousands of dollars to the cost of the loan over the
life of the typical 30-year mortgage.
While it is understood that customers with poor credit histories represent a
higher risk to the lender, potential borrowers need to make sure that they
aren’t classified as “subprime” by their prospective lenders. Studies show that
up to 15% of subprime borrowers have credit scores that should have entitled
them to loans at lower, more traditional interest rates. What this means for
potential borrowers is that you should shop around for the best price on a loan
and not accept it as fact when a lender tells you that you don’t qualify for the
traditional rates. The Federal Trade Commission is investigating several lenders
who have increased their profits tremendously by steering borrowers who should
have qualified for low-interest loans into higher-interest subprime loans,
claiming that they didn’t qualify for the lower rate.
How can you avoid such problems? Obtain a copy of your credit report. You can
obtain one, with your credit score, from any of the three major credit bureaus –
Experian, Equifax, or Trans Union. As a rule, lenders offer subprime rates to
customers who have credit scores below 620. If your score is higher than that,
you should be able to qualify for a better interest rate. If not, you can either
accept the higher rates from lenders, or take time to improve your score by
paying off some bills in a timely manner.
About the Author:
Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including http://www.homeequityhelp.net, a site devoted
to information regarding home equity lending. |
