If you’re one of the millions of Americans with bad credit, you could be wondering what a typical interest rate on a bad credit mortgage might be. In reality, there’s no such thing as a “typical” interest rate because there’s no such thing as a “typical” borrower.
Situations differ and lenders who offer these unique programs will look at your credit information according to the risks they are willing to take, so the interest rate you get is likely to vary based on those risks. To get an idea on how interest rates on a bad credit mortgage are calculated, it will help to understand a few basics about mortgage lending.
-> Mortgages are bought and sold to investors.
Mortgages are a commodity which are bought and sold like stocks and bonds, and just as there are low-risk stocks and high-risk stocks, there are low-risk mortgages and high-risk mortgages. When a stock has a low risk, it pays a smaller return. When a stock has a high risk, it pays a higher return.
When an investor purchases a bad credit mortgage, they are exposed to more risk because of the higher default rates on these types of loans. Due to this fact, they require a higher return on their investment.
-> Interest rates on a mortgage determine the return to the investor.
Since mortgages are bought and sold to investors, and since riskier investments require a higher return, interest rates on bad credit mortgages are higher than those for borrowers with good credit. Even though there is no such thing as a “typical” interest rate on a bad credit mortgage, borrowers who need such a loan can expect their interest rate to be several points higher than the good credit rates they hear about in those radio and TV ads.
*Affects pricing. With the No Closing Cost
Option, borrowers finance the closing costs instead of paying for them at
closing. Borrowers who pay closing costs at closing may qualify for a lower
interest rate. Some upfront fees (ex. credit report and appraisal) may apply
and may be credited at closing.
*Refinancing or taking out a home equity loan or line of credit may increase
the total number of monthly payments and the total amount paid when compared to
your current situation.
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