What's in a Name

• Lenders who offer subprime mortgages rarely call any of their loan products by that name, at least when talking to the borrower, especially after the 2007 "subprime mortgage crisis" (or "meltdown") that precipitated the recession in 2008. Also, even within the lending industry, the definition of a subprime mortgage isn't completely standardized. So the best rule of thumb in identifying a subprime mortgage is how much it costs and how it's structured, compared with other mortgages--not what the lender calls it.
  
  

Subprime Borrowers

• According to the Federal Deposit Insurance Corp. (FDIC), "the term 'subprime' refers to the credit characteristics of individual borrowers." A subprime mortgage is thus one offered to a subprime borrower, who is considered to be at a higher risk of not paying back the loan. Each lender has its own standards in assessing this risk, but generally the borrower's credit rating is a very important factor. Borrowers with a FICO credit score of less than 600--or sometimes 620 or 640, depending on the lender--are usually not eligible for a conventional mortgage.
  
  

Higher Expenses

• Subprime mortgages are generally more expensive than more conventional mortgages, but it isn't always as simple as merely having higher interest rates and fees, though they usually do. Sometimes added expense is built into a subprime mortgage through a structure called an adjustable rate mortgage (ARM), which does not feature a fixed interest rate throughout the life of the loan, but one that changes, or resets, at certain times.
  
  

ARMs

• In the case of subprime mortgages that are structured as ARMs, there is often an introductory interest rate that resets to a higher rate after a few years. Back in the 2000s, that was frequently a problem because many subprime mortgage issuers didn't bother to verify that the borrower could afford the higher rate. A lot of borrowers could not, creating a cascade of subprime mortgage defaults beginning in 2007.
  
  

Added Conditions

• Subprime mortgages also often have terms and conditions that conventional mortgages do not. One particularly onerous one for borrowers is a prepayment penalty, which assesses a fee when the mortgage is paid early, such as during a refinance. Another condition sometimes attached to a subprime mortgage is a balloon payment, meaning that the borrower has to pay the entire outstanding balance after a certain period, such as five years. Making a balloon payment, which depends on successfully refinancing the mortgage, hasn't always been possible for many subprime borrowers in recent years.
  
  

Benefits

• Despite the bad reputation that subprime mortgages have, when handled carefully by both borrower and lender they can help people buy houses who otherwise could not. That's especially true for a borrower who is earnestly recovering from a financial shock not of his or her making--a bankruptcy caused by medical bills, for instance. Rather than shutting such a person out of homeownership altogether, as the conventional mortgage market does, a subprime mortgage allows entry into the market, albeit a more expensive one.