Watch Out For Adjustable Rate And Sub Prime Mortgages

The purchase of a home is a very important and possibly the largest purchase that

most people will undertake in their lives, so it is vitally important that all the facts of the process be known before completing the purchase. There are dangers involved in adjustable rate mortgages and sub-prime mortgages that should be fully explored, before accepting such terms in a mortgage agreement.

Sub-prime mortgages are offered by lending institutions and banks to borrowers who are not able to qualify for standard mortgage loans, for any number of reasons. One common reason a borrower may not qualify for a standard loan, is that he does not have the minimum credit score to qualify for a loan from mainstream lenders

Although lending institutions will vary, a FICO score less than 680 may be referred to as sub-prime, and a borrower with such a score may have no choice but to accept a sub-prime mortgage. Another reason a borrower may not qualify for standard mortgage loans, is because his calculated income to debt ratio is lower than the required minimum ratio, and the lender suspects that he will not be able to meet the financial obligation of the loan.

Caution should be exercised when accepting a sub-prime mortgage, because the sub-prime lenders mitigate the extra risk they are taking by charging either high interest rates or interest rates that will vary over the life of the mortgage. This is referred to as an adjustable rate mortgage (ARM). These ARMs are not a good idea for those people who are not able to withstand fluctuating markets, as the rates can be adjusted arbitrarily by the lending institutions, by inflation and also because of other economic factors. These loans are easier to obtain but they often result in a horrendous financial trouble for the home owner, who may end up in bankruptcy, or may have his home foreclosed on because of his inability to meet his financial obligations, when the interest rate adjusts upwards to a point where it is not affordable.

Sub-prime mortgages are a great help for those borrowers who would not otherwise be able to enjoy home ownership. But the negative of this type of loan is that quite a few sub-prime lenders are predatory in their operations, and may often offer the sub-prime mortgage or mortgage equity loans to ill-informed borrowers who could qualify for mainstream mortgages.

Two points to bear in mind that may allow you to avoid the sub-prime abuse, is to firstly be suspicious of any solicitation by lenders who offer you a loan for a home or offer home loan refinance. These may be sub-prime lenders attempting to target you for exploitation. Make sure you explore all your options. Another way to avoid sub-prime abuse is to attempt to qualify for a mainstream mortgage loan. If you can get pre-qualified for such a loan, you will be armed with the knowledge of your true credit worthiness and debt to income ratio, and will be able to avoid predatory sub-prime lenders.

by: Nick Messe

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