The creditworthiness of a person is rated according to FICO scores. The range of a FICO score lies between 300 and 850. Scores above 720 are considered to be good, while scores below 620 are considered to be bad. These people come under the category called sub-primes.

People may have bad credit due to a number of reasons. It may be due to loss in business, leading to delinquency of payments or even bankruptcy. There may be a medical disability or physical problem due to any other factor. People apprehended in criminal cases also attain bad credit status, as they cannot keep up their payments. However, bad credit no longer deters people from getting their mortgages.

One of the ways is to go for a home equity loan. If the person has been paying some installments on his or her home for a certain period of time, then equity on the home gets built up. This equity can be used as collateral to buy a second mortgage. Home refinancing is another option; a person can exchange his or her first mortgage with a newer mortgage which may possibly have lower interest rates.

Sub-prime loans have the disadvantage of high interest rates. Higher interest rates allow the lenders to acquire more payments from the borrowers and hence reduce their losses in case of default. There may be other stringent restrictions like shorter repayment times and the necessity of a down payment to be paid upfront. In fact, the down payment becomes a blessing in disguise. If the mortgage borrower has saved enough for a down payment, then it reduces the liabilities on the mortgage, which can be paid off faster.

Though it is difficult for people with bad credit to get mortgages, it is not impossible. Bad credit borrowers must shop around for mortgages and scout for lower interest rates and other incentives. Prepayment is generally not allowed on a bad credit mortgage, as lenders do not allow bad credit borrowers to wrangle out of their loans that easily. Hence, a market survey to find out who provides the lowest prepayment penalties would be beneficial.

However, the best option for a person with bad credit is to improve their credit score. This is a long, arduous process, often achievable with patience and a sense of responsibility. Credit scores can be improved by making timely payments, and removing delinquencies by arranging for their payments.

The adjustable rate mortgage is excellent for homeowners who only plan to live in their homes for about three years. The interest rate will typically be low for the first three to seven years, but will begin to fluctuate after this time. Like other mortgage options, this loan allows the homeowner to pay on the principle early, and they don’t have to worry about penalties. When payments are made on the principle, it will help lower the total amount of the loan, and will reduce the time that is necessary to pay it off. Many homeowners choose to pay off the entire loan once the interest rate drops to a very low level, and this is called refinancing.

One of the disadvantages to adjustable rate mortgages is that they are often sold to people who are not experienced in dealing with them. These individuals will not pay back the loans within three to seven years, and will be subjected to fluctuating interest rates, which often rise substantially. In the US, some of these cases are tried as predatory loans. There are a number of things consumers can do to protect themselves from rising interest rates. A maximum interest rate cap can be set which will only allow interest rates to rise at a specific amount each year, or the interest rate can be locked in for a specific period of time. This will give the homeowner time to increase their income so that they can make larger payments on the principle.

The primary advantage of this loan is that it lowers the cost of borrowing money for the first few years. Homeowners will save money on monthly payments, and it is excellent for those who plan on moving into a new home within the first seven years. However, there are risks to this type of mortgage that must be understood. If the owner has problems making payments, or runs into a financial emergency, the rates will eventually rise, and the owner who cannot make payments may lose their home.

One term that you will hear lenders talking about is caps. The cap can be defined as a clause that will set the highest change possible for the interest rate of the loan. Homeowners can set up a cap on their mortgage, but they will need to make a request from the lender, as the cap may not be present on the rate sheets that are presented.

What does fixed rate mean?

A fixed rate mortgage is fairly straightforward, and does exactly as the name suggests. A fixed rate mortgage has an interest rate that remains the same throughout the mortgage term, meaning that your monthly repayments will remain the same, allowing for inflation of course.

Why a fixed rate mortgage?

Many people choose fixed rate mortgages because of the security and peace of mind that they provide. If you have a fixed rate mortgage, then you know your monthly repayments will not change, meaning you can budget effectively for both the short and long term. If you have a mortgage with a variable rate of interest then your payments can change depending on market fluctuations. This can leave you paying less, but often leaves you paying more each month. The best times to get fixed rate mortgages are when competition is high, and the fixed interest rate is lower than that of the tracker or variable rate mortgages.

Are there any drawbacks?

There are drawbacks to getting a fixed rate mortgage. The biggest drawback is that the interest rate is usually higher than that of variable rate mortgages. The added security comes at a price, in that you have to pay more in interest over the length of the mortgage. Also, the ‘fixed’ rate is usually only fixed for a certain number of years, usually 2 or 3, after which the rate can be put up and then fixed for another period. This can mean that your mortgage will be cheap now, but in the future the rate could rise.

Who should get fixed rate?

Despite its drawbacks, there are many people that should definitely opt for fixed rate mortgages. If you are on a tight budget and have a fixed income each month, then you cannot afford for your payments to rise. Having a fixed repayment each month means that you know you can make the payment even if national interest rates rise. Also, if you can get a deal whereby the starting interest rate is lower than that of a variable rate mortgage or even the same, then opt for the fixed rate mortgage.

How to decide?

If you are still unsure about whether or not a fixed rate mortgage is right for you, then consult an independent financial advisor. They will be able to help you find the best deal, as well as tell you whether or not the base interest rate is going to fall or rise. This will determine whether a fixed or variable rate mortgage is best for you.