A prime mortgage loans satisfy the criteria for quality mortgages set out by Fannie Mae and Freddie Mac, both government-sponsored enterprises (GSEs) responsible for buying the vast majority of home loans financed by creditors. Only borrowers with good credit histories and income amounts which are three to four times larger than their mortgage payments can be approved for prime mortgages. Home loans not within prime lending criteria are often referred to as sub-prime mortgages.
Prime mortgage loans are offered by creditors to their best customers. They feature interest rates at least as low as the present prime rate offered by the Federal Reserve to banks. Some prime mortgages, even though, feature rates substantially lower than that rate. Such loans almost always require down payments on the part of borrowers, which might be as much as 20% of the property’s sale price, although 10 percent is significantly more common.
Most mortgages are either prime or sub-prime in character. A fixed-rate prime mortgage has become the most common kind of home improvement. Its interest rate is stable over the life span of the loan. Adjustable rate mortgages (ARMs), though no longer widely used, can also be prime in character. ARMs feature very first low interest rates that adjust upwards or downwards at regular intervals, based on movements in the prime rate of interest.
Qualifying for a prime mortgage depends greatly on the condition of the financial markets. When the money supply is looser, folks with credit ratings from 620 to 650 often readily qualify. When it is tighter, those with scores below 690 could find themselves in sub-prime land. Borrowers sometimes get round this problem by using federally backed loans, like the ones in the Federal Housing Administration. FHA loans feature interest rates slightly higher than the prime rate.
Prime mortgages save home buyers cash since their reduced interest rates generally shave tens of thousands of dollars from the monthly mortgage payment on sub-prime mortgages. Alsodown payment requirements on such loans provide homeowners immediate equity value. If a down payment is large enough, the creditor won’t require private mortgage insurance, or PMI. Eliminating this yearly insurance coverage leads to even more savings.
Currently, a low credit score is anything below 620, according to the Home Buying Institute. Borrowers with bad credit ratings nearly never secure prime mortgages since lenders have discovered that lower-score borrowers often default at higher rates. To cover their risk, creditors charge these borrowers higher, or sub-prime, interest rates on their loans.