3 Alternatives to Getting a Traditional Mortgage
Alternative mortgage products allow buyers to defer payments of principal or interest. Depending on your situation, an alternative mortgage might be for you.
Be sure to use a home value calculator if you plan on selling a property and buying a new one. It’s very helpful for determining a realistic budget and planning for your down payment, with the average down payment in the U.S. a whopping $28, 932. Speak to a professional lender before deciding on your mortgage type too as each has their ups and downs and some can be financially risky.
Although more common among commercial properties, balloon mortgages can also be used on a residential property. With this type of mortgage, the buyer makes payments over a set period of time, usually five or seven years. After the term of the loan is over, the buyer pays the remaining balance in one lump sum, hence why it is called a balloon mortgage. This can be risky, however, because if you can’t make the large payment at the end of your loan, you will need to refinance and pay another set of closing costs. If you don’t qualify for a refinance, you may end up in foreclosure.
An interest-only mortgage is most beneficial to first time home buyers who are not accustomed to large monthly payments. This type of mortgage allows buyers to make smaller monthly payments during the initial term. For the first five or 10 years of your loan, you will make interest-only payments and nothing towards the principal balance of the loan. For the remainder of the loan term, you will then pay standard principal and interest payments. The downside is that after years of making payments, your loan payment won’t be reduced at all, and you’ll have zero equity, which makes it a risky investment for both the buyer and the lender. If the housing market crashed, you could also end up “underwater,” which means you owe more than the property is worth.
Traditional mortgages have a fixed interest rate for a set period. With an Adjustable Rate Mortgage (ARM), the interest can change. While the rate will not continually fluctuate, it can change depending on the particular mortgage you sign. A 5/1 ARM has a fixed interest rate for five years and will then change every year for the length of your term. A 2/28 ARM only has a fixed rate for the first two years and then a floating rate for the remaining 28 years. These are just a couple of examples. The pitfall of this mortgage type is the potential for negative amortization. Your payments could end up lower than the annual interest rate and the balance due will be added on the loan, which could affect your equity. Unless you plan on refinancing or selling before the initial term, you may want to consider a different type of loan.