Subprime Mortgage

Subprime mortgages could be a viable option for those without great credit. Find out the different options and how they work.

Subprime Mortgages Explained

Lending money can be an extremely profitable business, with many banks being some of the largest companies in the United States. However, it is also a risky business as well, with many borrowers defaulting and/or declaring bankruptcy. This has lead to banks creating a category of subprime lending.

Simple put, subprime loans are loans designated for borrowers whose credit score and history are not great and appear risky to a lender. There often come with higher interest rates and less friendly terms than those of prime loans. One of the most popular forms of subprime loans is subprime mortgages.

So, what makes a mortgage subprime?

Overview of Subprime Mortgages

As state before, subprime mortgages are mortgages designed for borrowers with subpar credit scores, often categorized at below 650. Because of this, subprime mortgages adjust their terms to compensate for the risk associated with those of so not great credit history. This means subprime mortgages will not be as friendly to borrowers as traditional mortgages, but can still be advantageous for a borrower.

There are a few different types of subprime mortgages available. Let’s look at them.

Adjustable Rate Mortgage

The most common type of subprime mortgage is an adjustable rate mortgage, or ARM. Adjustable rate mortgages are, as the name suggests, mortgages whose rates adjust over time. ARM’s have a few years in the beginning of the payment period where the mortgages rate is locked in. Meaning, the rates do not change in that time frame.

After the initial locked in period, the rates of the mortgage will change based on the market. This often leads to a payments increasing, often by a lot from the initial payments in the beginning. However, this is not always the case, with payments decreasing if the market adjusts for it.

A common type of ARM is a 2/28. This means that for the first 2 years of the mortgage, the rates are locked in. After the 2 years are finished, the next 28 years will have an adjustable rate.

Dignity Mortgage

A dignity mortgage is a fairly new type of subprime mortgage. Dignity mortgages allow for subprime borrowers to take out a mortgage with higher rates in the initial years. However, if the borrower proves they can make payments on time, a dignity loan will allow the mortgage to adjust to rates of a prime mortgage.

For example, a borrower does not have great credit history but feels that they can handle a mortgage payment. The borrower applies for a dignity mortgage. The bank will require the borrower to put a certain amount of money down, usually around 10%. The borrow will also be given a mortgage with higher rates. These higher rates will be for a set amount of initial years, such as 5 years.

If the borrow manages to make all their payments on time, the mortgage rates will adjust. The money paid towards the additional interest will be used to pay down the balance and the rates going forward will decrease to those of a prime mortgage.

Fixed-Interest Mortgages

A fixed-interest mortgage is very similar to those of a traditional mortgage, with a few differences. First, they are often longer terms than usual, with some being up to 50 years, compared to the norm of 30 years for mortgages. The longer term on a fixed-interest mortgage also usually comes with a higher interest rate. The longer term length allows payments to be lowered compared to the interest, but the borrower will still end up paying that interest over the longer term length.

Interest-Only Mortgages

As the name suggest, an interest-only mortgage consists or two payment periods. The first will consist of the borrower making payments that are directly put towards interest, rather than the principle. During that time, the borrower can pay additional money towards the principle, but this is not required.

After the interest-only period is up, the borrower can begin to make payments towards the principle. A lender will often allow the borrower to refinance after the initial interest-only period.

If subprime mortgages don’t have the best terms, should you even get one?

Why Get A Subprime Mortgage?

With subprime mortgages having less friendly rates and being a bit more complicated than that of traditional or prime mortgages, it may seem like they are not a good option. However, this may not be the case necessarily. Borrowers who have bad credit still need a home and subprime mortgages give those borrowers an option. While not the best, they are still advantageous, as they lead to being a homeowner.

Another key reason for getting a subprime mortgage is the ability to get better terms after a initial period of payments. As mentioned above, many subprime mortgages adjust to better terms after an initial period, or the lender gives the borrower the option to refinance.

Perhaps the greatest advantage to a subprime mortgage is the credit score restoration. If a borrower maintains a subprime mortgage, this can increase their credit score, leading to better loan options in the future.


Subprime mortgages are often blamed for the recession of 2009. Many banks were very wary to begin offering them to borrowers, especially with the economy in bad shape. However, with the economy in a good position now, and the housing market increasing, subprime mortgages are becoming a more viable option for those with limited options. Being a homeowner comes with many benefits, such as home equity loan, so it always wise to weigh the pros and cons of any loan options.

About the author

Lenders of the year

We would like to highlight the most popular lenders. These are the most trusted and highly rated loan companies based on customers reviews.

(based on 10 reviews)

(based on 26 reviews)

(based on 12 reviews)

Compare all lenders

Stay in Touch with

Follow Us on Facebook


Please rate Subprime Mortgage