Beware of Subprime Mortgage

If your score is under 620, you may want to consider building your credit before getting locked into a subprime mortgage. With subprimes it’s buyer beware, so you definitely want to read the fine print. These loan programs often have predatory prepayment penalties and inflated terms. It may be worth taking a year or two to repair your credit before buying a home.

Manuel and Geri wanted a home so badly that they went along with a lender who told them they could get a loan, but only at 2 percent over par. They were also told they could refinance in a year and lower their interest rate. Even worse, closing fees cost them nearly 8 percent of the loan, almost double the norm. These fees were added into the loan making the monthly payment even higher.
After a year of making all their payments promptly and paying down much of their debt, Manuel and Geri went in to refinance for a lower rate. It was a shock when they were told that it would cost them nearly $4,000 in prepayment penalties to refinance. Their loan documents had a clause that if the loan was paid off within three years it would cost 4 percent of the loan balance in penalties.
This left the homeowners with few options—continue paying a high interest rate for two more years or pay the prepayment fee—not a good situation. Manuel and Geri may have been better off taking a year or two to clean up some credit problems rather than getting locked into a subprime loan.
However, it can be a difficult call. Some lenders argue that it’s better to get a home now with a subprime loan than wait until real estate values are climbing. That may be true, but before committing to a higher than par interest rate, it’s still a good idea to have a competent financial adviser run the numbers and read the fine print.