What is a subprime mortgage? This is where the lender approves the loan for someone who has a credit rating below 620. Interest rate is also higher than conventional mortgages because the borrower is deemed high risk on defaulting on the loan. How high the interest goes depends on the size of the down payment, how often the borrower missed his/her payments in the past, and the credit score.
Many subprime mortgages comes with a prepayment penalty. If the homeowner pays off the loan faster than predicted or he/she refinances, he/she will pay a prepayment penalty. Some subprime mortgages are balloon mortgages. This is where the borrower will have to pay the full remaining balance at the end of loan term (usually in 5 to 10 years).
In the year 2007, many homeowners with subprime mortgage were force to foreclose on their home because of rising interest rates, which leads to higher monthly payments. In fact, some mortgage companies went into bankruptcy because of all the foreclosures.
