What Is a Nontraditional Mortgage?

A nontraditional mortgage broadly describes mortgages that do not have standard conventional characteristics. These can refer to any type of mortgage that doesn't conform to a standard 澳洲幸运5官方开奖结果体彩网:amortization schedule or have standard installment payments.

Nontraditional mortgages often come with higher interest rates because of the higher payment risks associated with the loan. Examples include balloon loans, 澳洲幸运5官方开奖结果体彩网:hybrid ARMs, or interest-only mortgages.

Understanding Nontraditional Mortgages

A mortgage is a debt used to purchase a property—a home, land, or other types of real estate. The owner pays down a predetermined payment amount—a combination of principal and interest—over a certain period of time, referred to as the 澳洲幸运5官方开奖结果体彩网:amortization period. The mortgage is secured by the prope🧸rty, so if the mortgagor fails to fulfill their financial obligation, the lender can foreclose on the asset.

Traditional mortgages are simply structured, where a 澳洲幸运5官方开奖结果体彩网:mortgagor borrows on a fixed or 澳洲幸运5官方开奖结果体彩网:variable interest rate, making pa൲yments until the loan is completely paid off. They offer borrowers predictability, so there are no surprises in terms of the monthly payment amount or when the loan ends.

Nontraditional mortgages are different because they offer a variety of other options for borrowers. These products give borrowers more flexible 澳洲幸运5官方开奖结果体彩网:repayment terms, allowing them to defer their payments—primarily the principal balance, bꩵut, in some cases, also interest. This lowers how much the borrower is initially responsible for before the full balance is due.

These types of mortgages often come with a higher risk. That's because there's a higher risk of default. Any of these mortgages require less asset and income requirements. There is a trade-off though—the lender can charge borrowers a higher interest rate. Nontraditional mortgages are usually extended to borrowers in nontraditional situations, including 澳洲幸运5官方开奖结果体彩网:subprime borrowers. Because they may not have another place from which to borrow, they're generally willing to acc🉐ept a higher interest rate along with the flexibility they offer.

Types of Nontraditional Mortgages

Some of the market’s most common nontraditional mortgages include balloon mortgage loans, 澳洲幸运5官方开奖结果体彩网:interest-only mortgages, and payment-option adjustable-rate♊ mortgages (ARMs).

Balloon Mortgage Loans

In 澳洲幸运5官方开奖结果体彩网:balloon-payment loans, both the principal and interest can be deferred until the 澳洲幸运5官方开奖结果体彩网:maturity date. Once the mortgage reaches maturity, the borrower is required to make a lump-sum payoff. Balloon-payment loans can also be structured with interest-only payments. Developers commonly use balloon-payment mortgage loans, which generally have higher inte♛rest rates and offer deferred payments.

Interest-Only Loans

Just like balloon-payment loans, interest-only loans are also commonly offered by developers. These loans require the borrower to make regular interest payments followed by a lump sum principal payment at maturity. In the case of building development, many developers use a 澳洲幸运5官方开奖结果体彩网:take-out loan 🌌at maturity or refina🐬nce a balloon payment loan with collateral once it has been built.

Payment-Option Adjustable-Rate Mortgages

澳洲幸运5官方开奖结果体彩网:Payment-option adju🎃stable-rate mortgages (ARMs) are among the most flexible nontraditional loans, offering numerous payment options for mortgage borrowers. These loans follow the adjustable-rate mortgage framework, but they give borrowers the option to choose the type ☂of payment they w🎃ould like to make each month.

Payment-option ARMs require a fixed-rate interest payment for the first few months or years of the loan. After that, the loan resets to a variable rate, usually charging a high margin to compensate lenders for some of the higher risks. In a payment-option ARM, the borrower can choose from several options offered by the lender when making their monthly installment payment. Payment options typically include a low fixed-rate option based on the introductory period rate—an interest-only payment—or a 15- or 30-year 澳洲幸运5官方开奖结果体彩网:fully amortizing payment.

Payment option ARMs can be complicated for both borrowers and lenders since they involve 澳洲幸运5官方开奖结果体彩网:negative amortization. With a payment-option ARM, any unpaid 澳洲幸运5官方开奖结果体彩网:principal or🙈 interest below the standard payment amount is added to the borrower’s outstanding principal, increasing ꦆthe amount of interest they are charged on subsequent payments.

The Bottom Line

If you don't qualify for a traditional mortgage, you might consider a nontraditional loan. While you might face higher interest rates because you're considered a higher risk borrower, you might be able to find a loan product that helps you secure a home.