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Subprime Mortgage

Subprime loans are designed for individuals with credit problems who cannot qualify for prime loans. Subprime loans have interest rates that are much higher than the market interest rates because they are of high risk to the lender. Subprime borrowers have credit histories that may include low credit scores, delinquent payments, or bankruptcy. Supporters of subprime lending argue that it has given opportunities to those who could not otherwise access credit. Others have criticized subprime lenders for predatory practices in which potential borrowers, who do not have the ability to meet the loan terms, are targeted because of their poor credit. There is no exact profile that identifies a potential subprime borrower, but most have a credit score of less than 660.

There are a variety of subprime mortgage types including interest-only mortgages, ‘pick a payment’ loans, and initial fixed rate mortgages. Interest-only loans require the borrower to pay only the interest for a set period of time, usually five to ten years. Pick a payment loans allow borrowers to choose the size of their monthly payment, which can be a full payment, interest only, or a minimum payment that can be lower than the required payment to reduce the balance of the mortgage. Initial fixed rate mortgages start off with a fixed rate and change quickly to a variable rate.