Significance

• Lenders have used borrowers' credit scores as a basis for interest rates since the system began. The lower the credit score, the higher the risk to the bank. Therefore, the lender charges more to those borrowers who present a greater risk.
  
  

Function

• Subprime lending allows borrowers with low credit scores the chance to own a home and increase their credit score with responsible debt management. If the credit score increases enough, the borrower can refinance into a new mortgage with a lower interest rate.
  
  

Types

• A subprime mortgage operates in the same manner as a conventional mortgage, with terms available from 10 to 40 years and fixed and variable interest rate options.
  
  

Considerations

• While a subprime mortgage interest rate may be significantly higher than a conventional mortgage interest rate, it may be the only option for a borrower with bad credit to purchase or refinance their home.
  
  

Misconceptions

• A subprime lender is the same thing as a predatory lender. While many times the two are considered the same, most subprime lenders operate to help home buyers, not hurt them.