#prime mortgage rate
What Are Prime Mortgage Loans?
Prime mortgages are given to those with good credit and sufficient income levels.
A prime mortgage loans meet the standards for quality mortgages set out by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) responsible for purchasing the majority of home loans funded by lenders. Only borrowers with good credit histories and income levels that are three to four times greater than their mortgage payments can be approved for prime mortgages. Home loans not within prime lending standards are often referred to as sub-prime mortgages.
Prime mortgage loans are offered by lenders to their best customers. They feature interest rates at least as low as the current prime rate offered by the Federal Reserve to banks. Some prime mortgages, though, feature rates considerably lower than that rate. These loans almost always require down payments on the part of borrowers, which may be as much as 20 percent of the home’s sale price, although 10 percent is more common.
Most mortgages are either prime or sub-prime in character. A fixed-rate prime mortgage is the most common type of home loan. Its interest rate is stable over the life of the loan. Adjustable rate mortgages (ARMs), although no longer widely used, can also be prime in character. ARMs feature initial low interest rates that adjust upwards or downwards at periodic intervals, based on movements in the prime interest rate.
Qualifying for a prime mortgage depends greatly on the state of the financial markets. When the money supply is looser, folks with credit scores from 620 to 650 often easily qualify. When it’s tighter, those with scores below 690 could find themselves in sub-prime territory. Borrowers sometimes get around this problem by using federally backed loans, such as those from the Federal Housing Administration. FHA loans feature interest rates slightly higher than the prime rate.
Prime mortgages save home buyers money because their low interest rates typically shave hundreds of dollars off the monthly mortgage payment over sub-prime mortgages. Also, down payment requirements on these loans give homeowners immediate equity value. If a down payment is high enough, the lender won’t require private mortgage insurance, or PMI. Eliminating this monthly insurance payment leads to even more savings.
Currently, a low credit score is anything below 620, according to the Home Buying Institute. Borrowers with low credit scores almost never secure prime mortgages because lenders have found that lower-score borrowers tend to default at higher rates. To cover their risk, lenders charge such borrowers higher, or sub-prime, interest rates on their home loans.