Definition - What does Subprime Mortgage mean?
Subprime mortgages are mortgage loans given to individuals with low credit scores (i.e. under 650), who are not able to qualify for conventional loans. Subprime mortgages are considered a higher risk for lenders. For this reason, mortgage lenders charge subprime borrowers higher fees and interest rates to cover the higher costs of subprime lending.
Justipedia explains Subprime Mortgage
In order for subprime lenders to price a subprime mortgage, they use a process referred to as “risk-based pricing.” For this reason, the costs of subprime mortgages can vary substantially based on many factors such as the down payment, the borrower’s credit score, and the type of debt delinquencies listed in the borrower’s credit report.
Critics of the subprime mortgage market argue that lenders may become predatory, convincing borrowers to purchase homes with subprime mortgages. Unfortunately, many of these subprime mortgage vehicles include the adjustable-rate mortgages (ARM). These loans offer an initially low interest rate, which is fixed for a number of years but which will reset at a specified time in the future, often rising as the market rates increase.
The United States experienced a subprime mortgage crisis in the late 2000s. In fact, many financial experts claim the rise of subprime lending was a major contributing factor in the financial downturn, in combination with a broader trend of lowering lending standards, the development of high-risk mortgage packages, the increase in U.S. household debt, and the decline of home values.
During the financial crisis, many high-risk borrowers who had borrowed money to finance their homes through a subprime mortgage (such as an ARM) were not able to refinance their home loans. As their interest rates reset to higher levels, home owners were unable to make their mortgage payments, and so mortgage delinquencies and foreclosures skyrocketed. Unfortunately, many of these subprime mortgages were held by global companies who ended up losing a great deal of money.