Difference Between High Risk Loans and Prime Loans

Difference Between High Risk Loans and Prime Loans - Below you will find reasons why it is always better to be able to get into a Prime or A paper loan as opposed to settling on a Subprime or High Risk Loan.

Probably the number one reason a borrower/home owner would want an A paper loan is the savings in interest paid each month. A subprime loan could run you up to 10%, 12% or higher. Lets take the smallest of these - 10%.

On a $100,000 mortgage, you would pay $10,000 per year in interest with a 10% loan. A prime or A paper loan could run you about 6.5% On the same $100,000 mortgage, you would pay only $6,500 per year. This is a savings of $3,500 per year or $291.67 per month.

Now say you are living in an area where home prices are running much higher, say $250,000. Multiply all number above by 2.5 and your savings per month is now $729.17.

Many borrowers who think they can only qualify for a Sub prime loan may very well qualify for FHA financing. FHA financing does not just look at a borrowers credit score. Instead it looks at the overall credit picture to determine eligibility. FHA home loans have rates that are very close to a conforming loan.

Another major difference between Prime mortgages and High Risk mortgages is the length of time of the prepayment penaly. With High Risk mortgages, most lenders know how desperate you are and are able to have a 1-3 year hard prepay penalty. (A hard prepay penalty is one where even if you sell the house in 1-3 years you still will have to pay a fee to close out the mortgage).

Most, if not all, Prime mortgages do not have a prepay penalty.

One of the biggest differences between qualifying for a Prime Loan vs. a High Risk Loan is your credit score. Borrowers with FICO Credit Scores of 720 FICO to 850 FICO are much more likely to be elgible for a Prime Loan vs. a High Risk Loan.

Although subprime mortgages are much more costly than prime loans, many home buyers with blemished credit history use these non-prime loans to re-build their credit profiles. After making timely payments for a couple of years, many homeowners see their scores increase dramatically, allowing them to refinance into prime mortgages with much lower interest rates.

Prime and sub prime lenders differ in the types of loans they offer. Prime lenders offer loans to those with credit scores of a certain minimum. Sub prime lenders provide loans to everyone else. Sometimes though, financing companies offer both types of financing.

Sub prime loans have higher rates and fees since the risk is higher for lenders. Reasonable lenders will only charge a couple of points higher for most types of loans.

High Risk mortgages will have higher margins than Prime mortgages. Most High Risk mortgages are ARM (Adjustable Rate Mortgage) based programs. These can start to fluctuate in a particular period of time. These ARM loans are made up of different components: the index, the margin, a floor and a ceiling.

The adjusting part of the loan is based on the index. This can be the LIBOR, the 12 month Treasury Average, the 6 month Treasury Average, the COFI, the COSI, or other numerous indices. The margin is how the bank makes its money. The floor is what the loan can never fall below. For High Risk mortgages, the floor is mostly the start rate of the loan. For Prime mortgage, the floor could drop all the way to the margin. Lastly, there is the ceiling. This is the highest to which the loan can go.

Top signs that you�re in financial risk: - While we all know that the quickest way to riches is to spend less and save and invest more, here are a few subtle (and not so subtle) clues that you could be facing impending financial doom:

You have little to no savings. Some experts recommend 6 months worth of reserves to completely protect yourself from unexpected emergencies; most lenders require 3 months worth.

You�re only making the minimum payment due on your credit accounts, adding significant time and dollars to the amount you actually pay for that new pair of shoes.

You don�t have adequate health insurance; one unexpected health issue can quickly drain any savings and ruin you financially.

You frequently depend on parents and friends to bail you out of financial binds; friends and family should never be a long term solution.

You�re charging more on credit than you make in monthly payments.

You frequently find yourself having to use pay-day type loans.

You�re using credit cards to purchase groceries, gas, fast food, and the like.

The balances on your monthly credit card statements rarely go down and you always seem to be at or close to your credit spending limit.

You�re using your savings to cover monthly debt.

You�re using one credit card to pay another, further compounding your debt.

You�re making your payments late; in which case you should always call the accounts you expect to be late on, explain your situation and try to negotiate a lower payment.

You consolidate debt but continue to use available balances; this is especially bad because most debt consolidation only spreads your debt out, and does not necessarily eliminate it.

One sure sign you are in financial trouble is you pay a credit card with a credit card. This is ultimately the last straw financially. Paying a credit card with a credit card show that you can no longer afford your monthly payments and the next step generally is a bankruptcy.

Another sign is using your home as a piggy bank. This means you have refinanced several times in a short period time frame to cover expenses and pull out needed cash. Eventually, you may run out of equity in your home and have nowhere to turn.

You can not afford required repairs on your home