Explore more affordable places to build equity as a homeowner.
You need to understand what an alternative mortgage is. Here’s what to know.
What is an alternative mortgage?
An alternative mortgage is a home loan with terms that differ from conventional, fixed-rate mortgages and may come with higher interest rates. In addition, there are several types of these alternatives available to homebuyers who can’t meet the requirements of a traditional mortgage.
A standard fixed-rate mortgage remains one of the most popular loans because of the stability it provides.
Thanks to the fixed-rate component of the mortgage, your interest rate stays the same for the term of the loan, usually 15 or 30 years. Assuming that you make the payments as scheduled, you know exactly when you’ll pay the mortgage off.
Even so, if a conventional mortgage payment is too high, there are alternative mortgages available. Alternative mortgages are also an option for those who haven’t established credit or lack enough employment history to show a steady income to qualify for a conventional loan.
Terms vary depending on the mortgage, but some common alternatives include:
- Adjustable-rate mortgages (ARM)
- Adjustable-rate mortgages with a temporary fixed interest rate
- Negative amortization mortgages
- Pay-option, adjustable-rate mortgages
- Interest-only mortgages
- Balloon mortgages
There are risks associated with alternative mortgages. Many products, like the negative amortization loan and the interest-only mortgage, don’t actually pay down the loan. If home values stagnate, borrowers may they’re upside down (their loan’s value is more than the home is worth).
With a balloon mortgage, a large portion of the loan is repaid with a single payment at the end of the loan period.
To be sure, a key factor with adjustable-rate mortgages is that the interest rate resets after a certain period, and that can lead to a sizable payment increases that make your monthly payment unaffordable.
Alternative mortgage example
Anna and Mark want to buy a home for $200,000. They can’t afford the payment on a 30-year fixed-rate mortgage, so they decide to take out a 5/1 ARM, with an initial fixed rate that adjusts after five years based on a specified index and then every year after that. Ideally, their home will appreciate in value during the intro period so that they can refinance into a conventional, fixed-rate mortgage before the payments are increased.
More From Bankrate
6 min read May 16, 2022
With steep home prices, California metro areas are the nation’s least affordable.3 min read Feb 21, 2022
A widely watched housing report comes out Thursday.1 min read May 16, 2022
Top consumer mortgage news of the week1 min read May 14, 2022
Mortgage fell off slightly this week, but it’s still a good idea to shop around for the best deal.1 min read May 14, 2022
There’s a flip side to every form of financing, and VA loans are no exception.5 min read May 12, 2022
There won’t be an immediate impact.3 min read May 12, 2022
Inflation is pushing mortgage rates higher.4 min read May 11, 2022
The end of the refinancing boom means mortgage borrowers’ credit scores have retreated — but only slightly.2 min read May 10, 2022