A subprime mortgage is a lending practice that can benefit borrowers with low credit scores. Typically, subprime mortgages are given to borrowers with a less than stellar credit history or to borrowers with other financial factors that make them too much a liability for a traditional loan. Usually subprime borrowers have a credit score of less than 640, which is considered a poor score. Based on these factors, the borrowers would not qualify for a traditional mortgage so banks give them a subprime loan with a higher than average interest rate. Because subprime borrowers represent a higher risk for the lender, most lenders charge a higher than prime interest rate.

The most common type of subprime mortgages that are offered are adjustable rate mortgages or ARMs. An adjustable rate mortgage initially offers a very low interest rate, usually below the prime rate offered by a traditional loan. For an informed investor who intends to fix and flip or only own a home for a short period of time, an adjustable rate mortgage can be a great investment tool. However, an ARM is somewhat misleading to uninformed borrowers as it initially charges a lower interest rate. After the ARM period the rate adjusts to a significantly higher rate and higher monthly payment. In addition, ARMs allowed borrowers to purchase homes that were too expensive for them to afford with a traditional mortgage, making it impossible for them to refinance to a fixed rate. These types of mortgages were given out frequently by banks to un-creditworthy buyers in 2005 and 2006. Once the loan reset to the higher interest rate, many borrowers were unable to afford their new monthly payments and defaulted on their home loans. ARM were largely responsible for the increase of subprime mortgage foreclosure increases in the mid-2000s.

In response to the foreclosure crisis, may law makers want to eliminate sub prime mortgages Arizona entirely. They cite these types of loans as being predatory lending practices as the interest rates can reach as high as 9% when a traditional loan hovers around 4%. They also claim that these loans are disproportionately given to people who make less than the median level of income and there is also fear that subprime mortgages could hurt minorities or young people.

Facts about Subprime Lending in Arizona

There is somewhat unfounded concern among law makers that sub prime mortgages Arizona are designed by banks to gain the most money from groups who have the least. The foreclosures of the mid-2000s helped fuel this fire. Politicians  make a variety of claims about the risks of sub prime lending in Arizona, however, many of these claims are simply not true.

The first assertion by politicians looking to discredit subprime lending in Arizona is that sub prime mortgages Arizona is that minority borrower will be discriminated against and only offered high interest loans. A demographic study indicates that this is untrue. By analyzing zip codes and demographics, it was concluded that subprime mortgages are not more common in zip codes with a Hispanic population concentration. 

A second claim against sub prime lending is that it unfairly discriminates against low income borrowers. This claim is categorically false. In fact, most subprime borrowers in Arizona are above the median income line. Most subprime mortgages tend to be second mortgages that are purchased as investment properties. Subprime borrowers also tend to own fewer low value homes than traditional mortgage holders.

Finally, another criticism is that subprime loans are unfairly given out to borrowers who are young without a substantial credit history. Subprime mortgages are not given out to mostly young borrowers. In fact, the average age of a borrower for a subprime mortgage was between 35 and 55 years of age. This indicates that subprime mortgages are not being used to penalize borrowers with insufficient credit history due to age.

Since subprime mortgages often reset to higher interest rates, they have unfortunately been lumped into the same category as title or payday loans. Some politicians see them as predatory practices without having all the facts. Sub prime mortgages Arizona are a tool that can be used for borrowers that would otherwise not qualify for a mortgage. As long as the borrower is informed about the risks, a sub prime mortgage can be an invaluable tool to help them purchase a home or investment property. Contact a local mortgage broker to determine your options and see if a subprime loan is a good option for you.

Dennis Dahlberg
Broker/RI/CEO/MLO