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Defining Subprime mortgage

Posted by Rona Fischman August 3, 2007 02:54 PM

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Subprime mortgages, are you sick of hearing about them yet? They are bad news, yes? Does everyone know what a subprime mortgage is and why they cost you so much more?

Let me explain:

Prime Lending Rate is set nationally. It is the base rate of all loans. Residential mortgages rates are higher than that prime lending rate. The subprime residential mortgage rate will be even higher than conforming residential mortgage rate.

The opposite of “subprime mortgage” is not “prime mortgage”; it’s a “conforming” mortgage. To get a conforming (or conventional) loan, borrowers must conform to rigid standards developed by mortgage lenders. These standards are not exact; there is some judgment involved. An applicant is judged on these factors: income to support the requested mortgage plus all other debt the borrowers has outstanding, credit history, job stability, and assets. So, someone with an unsteady job may still get a loan if he/she has a good credit history, a good income, and a hefty down payment. Likewise, someone with no down payment may get a prime mortgage if his or her job is stable and credit is excellent. Someone with a lot of debt, but good credit and income could get one.

Subprime mortgages have higher interest rates. They are frequently Adjustable Rate Mortgages that will go up in 2 or 3 years. They often have high up-front costs added into the debt. They are a significantly more expensive way to borrow money.

If you do not qualify for a conforming loan, it should be a warning sign. If the lender’s actuaries think you are a risky borrower, you may be. Check with another lender. If multiple lenders are tell you that you should not borrowing money, maybe you shouldn’t.

The trouble began when subprime lenders made it possible for almost anyone could borrow anything, for a price. It is a good thing that those days are over.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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