Bad Credit Mortgages: Make Teaser Rates Work for You
Mortgage Credit Problems Columnist
When you have bad credit,
expect to pay higher mortgage interest rates when buying or refinancing your home.
The introductory or "teaser" rates offered by many subprime lenders
can help you afford your home and restore your credit rating.
Teaser Rates Can Hurt Borrowers with Bad Credit
Many mortgage loans for borrowers with bad credit have 2
stages. The first phase is an introductory period of 2 or 3 years. During this
time the rate is fixed and is significantly lower than 30 year fixed rates.
This rate has been nicknamed a "teaser" because lenders use it to
make the loan more attractive to prospective borrowers. In the second phase,
the loan converts to an adjustable rate mortgage (ARM) and the rates and
payments can skyrocket. Unprepared or poorly counseled borrowers could be in
danger of losing their homes when this happens.
Teasers Can Make Homes
Affordable
Loans with teaser rates can help you improve your bad credit.
In fact they are sometimes called "band-aid loans" because they are
supposed to be temporary. The lower rate gives you a chance to buy a home that
would otherwise be unaffordable. The mortgage also allows you to build a
positive credit history by paying it on time. And finally, it provides a two-or-three
year window to clean up your credit. You should be able to refinance to a lower
rate before the introductory period ends and the rate goes up.
How to Shop for a Bad
Credit Mortgage
Check with several lenders for rates and fees because bad credit
mortgages are often underwritten and priced on a case-by-case basis. Make sure
that you will be able to refinance without a prepayment penalty before the loan
converts to an ARM. By using the first 2 or 3 years to change your behavior and
fix your credit, you can have a happy ending. Your reward will come when you refinance
to a better loan.
About the Author
Gina Pogol writes for
an online media company and specializes in finance and mortgage issues. She
formerly worked as a systems consultant with Experian and a mortgage consultant
with Centex. She has a BS in financial management from the University of
Nevada.
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