A subprime mortgage is a loan given to a borrower who is considered to
be a higher risk due to a poor credit score. Typically a subprime borrower has
a credit score of less than 640, but this does vary. Since the lender is
assuming a higher risk, the interest rate is also generally higher. Critics of
subprime lending argue that it charges unfair interest rates and further
burdens individuals with low incomes and high amounts of debt. However, if used
correctly a sub prime mortgage, Texas
can benefit all Texas home buyers, even those with good credit. There are
several types of subprime mortgages available and each type has different
advantages and risks.
The most common type of Texas subprime mortgage
offered in the state is an adjustable rate mortgage
or ARM. An ARM starts out with a low interest rate that is locked in for a
specified period of time, usually between 1 and 7 years. At the end of the
term, the rate adjusts to a higher rate. ARMs earned a bad reputation in the
mid-2000s for contributing to the foreclosure crisis. However, it is important
to note that many of these ARMs were given to buyers with bad credit who
overextended themselves by buying homes that were more expensive than they could
afford. When the rate reset they could no long make their monthly payments.
Although the rate of ARMs
does adjust with time, you can always refinance to either a lower fixed rate
mortgage or even another adjustable rate mortgage. Taking advantage of the
lower interest rates of an ARM could save you thousands on mortgage interest,
giving you more money to pay off the balance of your loan. As a result, you can
pay off your home sooner and pay significantly less interest.
Using an ARM to your Advantage
For many people, a traditional mortgage actually costs them
money and simply does not make sense. Most people do not live in a home for 30
years, in fact the average time frame is 8 to 10 years. Even if they stay for
longer, most people end up refinancing their mortgage at least once and some
people refinance every 2 to 3 years. This ends up costing a significant amount
in interest because in traditional home loans, you pay the majority of you
interest during the first half of the loan term. Also, traditional 30 year
loans charge a higher interest rate as a type of insurance for the lender. The
lender assumes you will take 30 years to pay off the debt. 30 years is a long
time and there is a chance that something could happen that would cause you to
default. The lender charges you a higher interest rate to earn more money to
keep as a type of insurance against default. The terms on an adjustable rate
are only about 1 to 7 years so they can offer a lower interest rate since the
term is shorter and less risky for the lender. An adjustable rate mortgage has
a much lower interest rate than a traditional mortgage which can save you
thousands of dollars over the loan term. Using this type of sub prime mortgage Arizona can save you
significant amounts of money and should be considered by both prime and sub
prime borrowers alike. Here are a few situations when an adjustable rate
mortgage actually makes more sense than a traditional mortgage:
You have bad credit, but you are working on it.
An ARM is a fantastic option to help rebuild your credit score. If you know you
will be able to qualify to refinance before the rate adjusts, it is a good way
to get into a home and start rebuilding your credit score.
You plan to sell your home prior to the rate
raise. If you only plan on living in your home for a short period of time, an
adjustable rate can save you money. If you sell before the rate raises you will
never have to pay the higher interest rate.
You plan to fix up the home and sell it for a
profit. If you are not planning a long term investment, an ARM can save you
money while you are renovating.
You expect your income to increase. If the loan
resets, you will be able to pay the higher interest payments because you will
be earning more money.
You expect a windfall. You know you will be able
to pay the home off early due to an inheritance. Then the ARM can save you
interest while you wait to pay off the home.
There are certain
risks for adjustable rate mortgages but these can be minimized by smart
The most important piece
of advice regarding ARMs, is to never overextend yourself. An ARM often allows
buyers to buy a home that is higher than they could qualify for with a
traditional mortgage because the lender looks at the monthly payments. Once the
rate resets these can increase and the buyer can actually be priced out of the
home they already own. This can lead to default and foreclosure. Talk with a
mortgage broker to get the most up to date information about Texas sub prime mortgage
programs to see what makes the most financial
sense for you and your family.
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