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| Subprime loans are pricey, but can help credit history |
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| Who is a
candidate?
So, if that's how the subprime process works and those are
the rates, who should consider borrowing?
The advice is mixed, but generally speaking, someone
whose monthly obligations are swallowing too much of the weekly paycheck might
benefit from refinancing the mortgage at a subprime rate and taking out cash in
the process to pay off debts. The cost over the loan's lifetime will rise, but
the tax-deductibility of mortgage interest makes it cheaper than the interest
charged on most credit cards, auto loans and the like. And
subprime loans can help renters become homeowners. While the rate charged will
be high, a one- or two-year history of on-time mortgage payments will help demonstrate
creditworthiness. That, in turn, could mean a less expensive refinancing down
the road, assuming rates don't spike.
Still, experts caution that getting a subprime loan
means much greater interest costs over time. A 30-year fixed loan
for $200,000 at the higher rate of 8.5 percent, for instance, would
have monthly payments of $1,538 and total interest of $353,618.
Compare that with the 6.71 percent national average (based on a
Bankrate.com survey in June 2006), the same loan would require payments
of just $1292 and cost $265,078 in total interest -- a savings of
nearly $90,000 over the life of the loan.
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