In a traditional mortgage, you have a fixed interest rate and you make the same monthly payment throughout the lifetime of the loan. Non-traditional mortgage plans have lower monthly payments, but this doesn't come without a price. Research all of your options before you lock yourself into a non-traditional mortgage. You may be biting off more than you can chew in the long run.
Types of Non-Traditional Mortgages
In an adjustable rate mortgage (ARM), the interest payment remains steady for a certain period of time, but then adjusts every year. You could also get an interest-only loan, which allows you to pay only the interest on the loan for several years before you start to repay the principal. A negative amortization loan offers the lowest monthly payment, but it's less than the interest you owe. The interest that you're not paying that month gets added to the principal, which you must repay later. A payment-option ARM allows you to choose what you pay each month -- either a traditional payment, interest-only payment or a minimum payment, which is less than the interest you owe.
Benefits of Non-Traditional Mortgages
Non-traditional mortgages typically have lower interest rates and lower monthly payments than traditional mortgages. This can allow you to afford to purchase a home now. It may be a good solution if you know that you are going to make a lot more money in a few years. For example, if you're in your last year of medical school, you may need a cheap mortgage payment now, but you'll be able to pay much more per month later.
Building Equity in Your Home
One of the biggest incentives to purchase a home is the ability to build equity in the home. Equity is the amount of the home that you actually own. In many non-traditional mortgages, you are not building much -- if any -- equity in your home.
Risks with Non-Traditional Mortgages
The biggest risk with a non-traditional mortgage is that your payments can significantly increase after the first five years, because of either rising interest rates or the addition of a principal payment. In the worst-case scenario, adding unpaid interest to the principal balance of the loan, along with fluctuations in the housing market, can mean that you actually owe more on the home than the home is worth. Also, if you are assuming that your income will go up and it doesn't, you could be faced with losing your house if you can't pay your increased mortgage payments.
Maggie McCormick is a freelance writer. She lived in Japan for three years teaching preschool to young children and currently lives in Honolulu with her family. She received a B.A. in women's studies from Wellesley College.