Bad Credit Mortgages: Points Explained

By Gabriel Traverso
Mortgage Credit Problems Columnist

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One of the biggest problems in the subprime mortgage market--a term that refers to those borrowers who have bad credit or other problems that make it harder to secure financing--is that minorities, the less educated, and the elderly are often taken advantage of. It is very important that if you have bad credit and are shopping for a home loan that you understand the process and terminology.

Understanding the Mortgage Business

Fear of the unknown can be a mind-killer, so the more you know about the mortgage process, the more likely you are to get a better deal--and maybe enjoy yourself more while getting your home loan.

What Are Points and how do They Affect Me?

The Federal Trade Commission defines points as fees paid to the lender for the loan. One point equals one percent of the total mortgage loan amount and they are usually paid at closing as part of the closing costs. Points can sometimes be financed, or borrowed, but this will add to the total cost of the loan. Essentially, points are charged to lower, or buy down, the interest rate, or to obtain more favorable terms, such as eliminating a prepayment penalty.

For example, you might be able to obtain a 30 year mortgage at a 7% rate for no points, a one point charge might lower the rate to 6.75%. The actual cost of borrowing will be disclosed on a Truth-in-Lending (TIL) form as an APR so you can see which rate results in less interest and fees over the life of the loan.

How Bad Credit Affects Points

Borrowers with bad credit can still in many cases qualify for a home loan, but bad credit will affect the terms of your loan, including the interest rate you pay and points charged. Generally, subprime loans carry higher rates and you would have to pay points to get the same rate a good credit borrower could get for no points. Often, bad credit mortgages carry prepayment penalties, and if you want to get rid of the penalty you may have to pay points.

Ask Questions

The more you know, the more likely you will be able to ask the right questions and get a better deal on your mortgage. Understand the points and other fees and ask your lender where and how these fees can be negotiated.

Federal Trade Commission

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