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Definition: Sub-Prime Mortgages
A mortgage given out to a borrower with a poor credit rating is a sub-prime mortgage. A sub- prime mortgage has a higher risk of default and hence is given out at a higher rate of interest than conventional mortgage. They also have higher penalty and late payment fees. Sub-prime mortgages in the USA are defined by credit ratings lesser than 620 – borrowers who habitually default on payment of bills, and falls behind on repayment of debt etc.
Sub-prime mortgages also typically have pre-payment penalties i.e a fee for early repayment of the loan.
There are two types of sub-prime mortgage loans: Adjustable Rate mortgages and balloon mortgages. Adjustable rate mortgages have variable interest rates which are varied according to a specific benchmark with a particular frequency- usually monthly.
Balloon mortgages involve a fixed payment for a regular period and a lump sum payment towards the end of the term.