What does the term “subprime mortgage” refer to?

The term "subprime mortgage" refers to loans that are specifically designed for borrowers with lower credit ratings. These individuals typically have a higher risk of defaulting on their loans due to factors like a limited credit history, late payments, or overall creditworthiness concerns. As a result, subprime mortgages often come with higher interest rates compared to prime mortgages, which are extended to borrowers with good credit.

Subprime lending plays a crucial role in making home ownership accessible to a broader range of consumers, including those who may not qualify for traditional loans. However, because these loans involve a greater risk for lenders, they often include additional fees and higher costs that reflect that increased risk associated with lending to borrowers with lower credit profiles. Understanding this concept is vital in the mortgage lending landscape, as it highlights both the opportunities and the potential challenges faced by subprime borrowers.