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Subprime Home Equity Loans are Relatively Cheap Money Staff - Mortgage Lenders Plus.com

A subprime borrower is a borrower with a less than stellar credit history who falls below a certain credit score – usually the cutoff figure is a credit score of 620. Subprime loans have higher interest rates than those available to people with sparkling credit, and there is a range within the subprime category that establishes just how much higher those rates will be. Based on your credit score and history, you’ll be assigned a grade of A, B, C or D just like in grade school – complete with pluses and minuses.

Subprime home equity loans are similar to subprime mortgages, in that they are collateralized loans that are more expensive than those available to the prime borrower. Fixed interest rate loans will be higher and adjustable rate loans will have higher margins. If, however, you are already in the home and want to take out a home equity loan, a subprime mortgage can help repair a damaged credit history – but it will cost substantially more than a standard home equity loan.

Someone with a generally good credit record, but who paid their mortgage 30 days late within the past year, could earn an A-minus. The grade of D could be the result of bankruptcy or foreclosure. Subprime lenders will look at a potential borrower's general pattern of financial behavior. If you are usually on time with your payments, you'll most likely be a B or a C consumer.

A borrower's credit grade determines a number of factors, including what rate the loan will carry and how much of a home's value will be loaned. The current difference between a prime home equity loan and a subprime loan for the same amount and the same period of time may be as much as two percentage points. If the borrower’s credit rating is really marginal, the rate differentiation may be higher than that from some lenders.

Still, a subprime home equity loan is going to be relatively cheap money to a person with a poor credit rating because it’s cheaper than a non-collateralized loan or short term credit card debt. Given that it’s the best of a set of expensive options, combined with the fact that prompt payoff of a subprime loan can improve your credit rating, it may be a reasonable option – if, of course, you can squeeze those payments into the budget.