What factors affect subprime mortgage rates?

Before you can understand the factors that affect subprime mortgage rates, you have to know what subprime mortgage rates are. Basically, subprime mortgages are risky lending programs that allow people with less-than-stellar credit ratings to get financing to buy a house. The term "subprime," as in "subprime mortgage" or "subprime lending" doesn't refer to the interest rates; rather, it refers to the borrower's credit rating. Typically, subprime borrowers have credit scores that are less than 620 on a scale of about 300 to 850 or 900. Most consumers fall in the high 600s and 700s [source: Bankrate.com]. Even so, during the housing boom in the first decade of this century, people took out subprime loans when they could have gotten regular ones, due in part to aggressive mortgage brokers [source: Brooks].

One of the catches on subprime mortgages is the interest rate fluctuations. A number of risk-based factors determine the rates, including the borrower's credit score, how much money was put down upfront, how many late payments are listed on the borrower's credit report and the type of delinquencies they were. Despite high interest rates, subprime mortgages were attractive to many home buyers in the early 2000s. They allowed people with bad credit to get home loans that would otherwise have been unavailable to them. Of course, the downside is that these people were more likely to default on their loans and be unable to pay back what they owed. That's why there were so many foreclosures at the end of the first decade of the century. But the borrowers weren't the only ones hurt: Many lenders had to close shop, too, since they weren't getting back their money.

Along with all of the other negative impacts of the subprime scene, accusations began surfacing that lenders had targeted minorities with their predatory lending. They supposedly took advantage of inexperienced borrowers and made it even harder for them to pay back their loans.