Booyah Breakdown: Subprime Time

At that point, you're considered a subprime borrower, meaning your credit is less than prime. No surprise, many low-income folks fall into this category.

But what if the guy with bad credit, a.k.a. the subprime guy, still wants to buy a home? He won't qualify for a regular -- or prime -- 30-year mortgage. The interest rate for that is hovering around a very nice 6.14% these days, the lowest level since mid-December.

The subprime borrower has no choice but to seek a more expensive loan that will allow for his not-so-clean past.

That means he needs a subprime loan. The typical subprime loan is called the 2/28 adjustable-rate mortgage (ARM). That means that for the first two years, the interest rate will be fixed. Because the borrower is a risk, the interest rate will be very high -- anywhere from 9% to 12%. After the two fixed years, the interest rate will adjust, usually annually, on the basis of an index plus some extra percentage points, for the remaining 28 years of the loan.

The typical 2/28 loan adjusts around LIBOR (London interbank offered rate) plus 6%. LIBOR is around 5.25% these days. Add 6% to that, and you're looking at a rate of 11.25% if those two fixed years expired and the loan started to adjust today.