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What Is a Subprime Mortgage?


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TERMINOLOGY

With all the talk about our economy's subprime mortgage crisis of the 2000s, you may be wondering what exactly a subprime mortgage is. A subprime mortgage is a type of loan granted to people who have poor credit histories, usually with FICO scores below 640. They would not be qualified for conventional mortgages as a result of their poor credit ratings. Sometimes, those who do not have enough money for down payments are granted subprime mortgages. As these subprime borrowers represent a high risk for mortgage lenders, they are charged interest rates above the prime lending rate.

There are various types of subprime mortgage structures available. Some special features that are available with subprime loans include these:

  • payments for which borrowers need to pay interest only over a certain period (usually 5 to 10 years)

  • loans with adjustable rates and the option for borrowers to pay a minimum payment, full payment or interest only in a given month

However, the most common structure is called the adjustable-rate mortgage (also known as the hybrid mortgage). In this structure, an initial fixed interest rate is charged before it is converted into a variable rate that is based on the LIBOR index, plus a margin on top of that.