Many people aspire to become homeowners, but certain factors like inadequate finance may limit them, and they often opt for mortgages. Subprime mortgage offers people with poor credit records an opportunity to become homeowners, although widespread use of subprime mortgages could cause certain risks to the banks.
Subprime mortgages are loans credited to individuals with impaired credit records or individuals with other characteristics related to the high probability of default. Subprime mortgages aim to lend mortgage loans to the people who do not qualify for normal mortgage loans. The lending rates in this type of mortgage are always higher compared to the standards of a typical mortgage since the default rate is high. The high-interest rates are intended to compensate the lender for taking a significant risk in lending to such borrowers. People with poor credit records tend to benefit more from this kind of mortgage because it offers them an opportunity to become homeowners regardless of their credit score records. This group of people cannot receive the normal mortgage offer. Therefore the subprime mortgage acts as a helping hand to them.
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The increased use of Subprime mortgages poses risks for the banks and could cause adverse effects on the banking institution. Since subprime loans are granted to people with a high probability of default, there is a risk that banks incur losses resulting from defaulters. Widespread of this kind of mortgages means more risks for banks incurring losses, which could eventually lead to bankruptcy. The banks should take precautions in offering the subprime mortgage service, or they risk losing money.
In conclusion, subprime mortgage offers an opportunity to people termed as ineligible for normal mortgages, a chance to be homeowners; however, this kind of mortgage could lead to banks losing money.
