Alternative mortgage loans

A number of new mortgage options have emerged in response to interest rate fluctuations and increasing costs for housing. Most alternative lending approaches aim to keep the monthly payment as low as possible, especially in the early years of the loan for firsttime and lower-income buyers. The lower payments also permit borrowers to purchase larger, more expensive homes than theycould afford with a traditional loan.

Interest-Only Mortgage 

With an interest-only mortgage loan, you pay only the interest on the mortgage in monthly payments for a fixed term. No monthly payment is made on the debt itself. After the end of that term, usually five to seven years, you can refinance, pay the balance in a lump sum, or start paying off the principal with a commensurate jump in the monthly payment. The obviouslure of an interest-only mortgage is its lower monthly payment.

Graduated-Payment Mortgage 

With a graduatedpayment mortgage, smaller-than-normal payments are required in the early years, but payments gradually increase to larger-than-normal payments in later years. The interest rate is fixed, but payments early in the life of the mortgage may be lower than necessary to pay even the interest, resulting in possible negative amortization. Graduated-payment mortgages are attractive to buyers who expect substantial increases in their income in the future.

Lender Buy-Down Mortgage

 With a lender buy-down mortgage, a base interest rate is set for the loan that is perhaps 0.5 percentage points higher than the interest rate for a conventional mortgage. For the first year, the borrower pays a rate 2 percentage points below the base rate. In the second year, the rate is 1 point below the base rate. In the third and future years, the base rate would be charged. These changes are known in advance and are contractual. First-time home buyers often use buy-down mortgages to take advantage of lower monthly payments in early years of the loan.

Rollover (Renegotiable-Rate) Mortgage

 A rollover mortgage consists of a series of short-term loans for two- to five-year time periods but with total amortization spread over the usual 25 to 30 years. The loan is renewed for each time periodat the market interest rates that prevail at the time of the renewal.

Shared-Appreciation Mortgage 

With a shared-appreciation mortgage, the lender offers an interest rate about one-third less than the market rate. In exchange, the lender gains the right to receive perhaps one-third of any appreciation in the home’s value when the home is sold or ten years after the time of the loan.

Growing-Equity Mortgage 

The growing-equity mortgage (GEM) is meant for people who design their loan in advance to reduce interest costs by paying off the mortgage loan early. One form of GEM is the biweekly mortgage, which calls for payments to be made every two weeks that represent half of the normal monthly payment. The borrower, therefore, makes 26 payments per year. For example, a $200,000, 7 percent, 30-year loan requires a $1330.60 monthly payment for a total of $15,967.20 (12 $1330.60) paid in one year. On a biweekly basis with payments of $665.30 ($1330.60 2), the total amount paid each year would be $17,297.80 ($665.30 26). The difference of $1330.60 ($17,297.80 $15,967.20) is equivalent to one extra monthly payment per year and is applied to the principal of the loan. Under the biweekly repayment plan, a loan may be repaid in approximately 20 years, rather than the 30 years dictated by the monthly payment plan. Setting up a loan as a GEM from the beginning forces you to make the agreedupon additional payments. However, almost all mortgage lenders permit payment of additional amounts toward principal at any time as a way to get the loan paid off faster and reduce interest expenses. For example, even paying an additional $70 (or $1400.60) per month on the preceding loan would allow the loan to be paid off in just over 25 years and would save almost $50,000 in interest costs.

Assumable Mortgage 

With an assumable mortgage, the buyer pays the seller a down payment generally equal to the seller’s equity in the home and takes responsibility for the mortgage loan payments for the remaining term of the seller’s existing mortgage loan. The buyer’s goal is to obtain the loan at the original interest rate, which should be below current market rates. This approach will work only if the original mortgage loan agreement does not include a due-onsale clause. Such a clause requires that the mortgage loan be fully paid off if the home is sold. It can impose a burden on the seller because it prohibits a buyer from assuming the mortgage loan.

Seller Financing

 Seller financing occurs whenever the seller of a home agrees to accept all or a portion of the purchase price in installments rather than as a lump sum. Usually seller financing is a short-term arrangement, however, with payments based on amortization occurring over perhaps 20 years and a balloon payment due after perhaps five years. That is, all principal  not paid after five years would be due at once. In most seller financing, the buyer obtains the title to the property when the deal is closed and the contract is signed. In contrast, a land contract (or contract for deed) brings greater risk for the buyer because all terms in the contract (including payment of the debt) must be satisfied before transfer of title will occur. As a result, if you move before paying off the contract in full, you forfeit all money paid in installments to the seller and any appreciation in the home’s value. You= build no equity until the contract is completed.

Reverse Mortgage.

 A reverse mortgage, also known as a home-equity conversion loan, allows a homeowner older than age 61 to borrow against the equity in a home that is fully paid for and to receive the proceeds in a series of monthly payments, often over a period of 5 to 15 years or for life. The contract allows the person to continue living in the home. Essentially, the borrower trades his or her equity in the home in return for either a fixed monthly income or a line of credit that can be drawn upon at the option of the homeowner. The most likely prospects for such loans are elderly people who have  paid off their mortgages but are strapped for income. The mortgage does not have to be paid back until the last surviving owner sells the house, moves out permanently, or dies.

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