 TITLE: What Is a Subprime Mortgage? CONTENT: Types of Subprime Mortgages\n---------------------------\nHere are three types of subprime mortgages you may encounter:\n**Adjustable-rate mortgages (ARMs)**: ARMs start out at relatively affordable \"teaser\" rates then, after a specified introductory period (typically one year), shift to a floating rate tied to a published central-banking interest rate such as the Monthly Treasury Average Index (MTA Index or 12-MAT). This shift, which may occur annually, can strain household budgets and add significant unpredictability to home finances.\n**Extended-term mortgages**: These loans have repayment periods of 40 years or even 50 years instead of the 30 years typical of conventional mortgages. At comparable interest rates, a loan duration 33% to 67% longer than that of a conventional mortgage could cost you tens or even hundreds of thousands of dollars over the life of the loan. And of course interest rates on subprime mortgages are not comparable to those of conventional mortgages—they're typically higher, so the long repayment period has an even greater sting.\n**Interest-only mortgages**: With an interest-only mortgage, the borrower has the option, during the initial part of the repayment period—typically five to seven years—to pay only the interest due on the loan (without paying back principal). At the end of this intro period, the borrower can renew the loan or refinance and begin paying down principal.\nThe APRs are typically higher by half a percentage point or more on interest-only mortgages compared with comparable conventional loans; and origination fees on interest-only loans are often even higher than on other subprime loans.\nInterest-only mortgages tend to work best for borrowers who use interest-only payments as an emergency option. These borrowers routinely make full principal-and-interest payments and make reduced interest-only payments on months with unexpected expenses. Borrowers who exercise the interest-only payment option face greater risk of loss than conventional mortgage holders if they're forced to sell their home in a period of flat or falling property values.  \nWhat Are the Disadvantages of Subprime Mortgages?\n-------------------------------------------------\nThe main downside to a subprime mortgage is its high cost. The higher interest rates and fees that accompany a subprime mortgage can significantly increase the amount you'll pay for your home over the life of the loan.\nBy adding additional payments and stretching out the duration of the loan, extended-term mortgages can amplify the effects of those high interest rates. And adjustable-rate mortgages, with their regular recalculation of your mortgage interest rate, can make it difficult to predict and plan your household spending from one year to the next.  \nShould You Get a Subprime Mortgage?\n-----------------------------------\nAs the name implies, a subprime mortgage is less than ideal. That's not to say there aren't reasonable justifications to get one, such as to buy a home that's a rare bargain you don't want to let slip away. If you're on the path to rebuilding your credit and you're confident you can afford the payments, you may be right in taking out a subprime loan.\nIf you do, and you plan to stay in the house for more than a decade or so, consider refinancing your subprime mortgage five or 10 years in the future. By then, your income and credit profile may have changed in ways that make a more affordable conventional mortgage an option. Before doing so, review the numbers carefully (including the fees as well as the interest rates on a new mortgage) to make sure refinancing saves you money, but if you're able to swap a subprime loan for a conventional one, there's a good chance it will pay off.  \nConsider Improving Your Credit Score\n------------------------------------\nIf a subprime mortgage is all you qualify for today, and you're in a position to wait a year (or longer) before financing your first home, another option is to take steps today to improve your credit. That's also a good idea if you choose to pursue a subprime mortgage today with the goal of refinancing years from now. (Heck, it's a good idea if you plan to borrow money at any point in the future, for any reason.)\nAdopting habits today that promote improvements in your credit reports and credit scores can bring many benefits. Qualifying for better terms on loans and credit cards could save you thousands of dollars, but there are other advantages to good credit as well, including reduced insurance premiums and lower security deposits on apartment leases and on car and equipment rentals. END