Sub prime loans charge a higher interest rate because the risk the lender is taking on the borrower. Due to the fact that the borrower does not have a very strong or very good credit rating or history, the chance that they’ll default (fail to pay) on their loan is much higher.

An FHA loan insures the lender against this high risk borrower, which benefits everybody. The lender is insured that the loan will be paid and the borrower can get better rates of interest by having an FHA secured loan.

FHA secured loans have some of the lowest interest rates on the market, where sub prime loans carry at least three percentage points higher than the standard FHA loan interest rate. That equals to about $200 a month more for every $100,000 mortgaged, which makes a big impact on the borrower being able to pay the loan amount each month.

Sub prime loans are almost always adjustable rate mortgages (ARMs) ? an ARM mortgage has a fluctuating rate of interest that changes from time to time based on the prime interest rate plus the lender’s margin. This interest rate, which usually changes once or twice in the first year then once a year after that, can greatly affect your mortgage payments each month, making them higher or lower. For many people, an ARM mortgage is a dangerous bet because if the mortgage interest rate goes up, they might not be able to afford the new higher payments.

The majority of AZ FHA loans are fixed rate loans, where the interest rate is determined at the beginning of the mortgage and stays the same throughout the term (usually three to five years). A fixed rate mortgage payment stays the same every month and is better for people who live on a budget. If by chance, you’ve an FHA insured adjustable rate mortgage in Arizona, the rate is capped at an increase of no more than one or two per cent each year. Subsequently, the lender fees for sub prime loans are also considerably higher than an FHA insured loan.