Nontraditional Mortgages

DEFINITION of 'Nontraditional Mortgages'

A broad term describing mortgages that do not take the traditional form. A traditional mortgage would require a relatively high initial down payment of about 25% and 25-year payment schedule with an interest rate that is compounded on a monthly basis. Nontraditional mortgages include interest-only mortgages, payment option adjustable rate mortgages (ARMs) and subprime mortgages.

BREAKING DOWN 'Nontraditional Mortgages'

A subprime mortgage is extended to individuals who are of higher risk due to a history of bankruptcy, a higher debt to equity ratio, a history of non-payment of debt despite sufficient cash flow and/or a low credit score.

Interest-only mortgages are balloon loans in which the borrower must service the interest during the life of the loan and then make a balloon payment at maturity to pay off the principal.

ARMs are loans that have interest rates that will be reset in periodic intervals. These intervals can vary from months to years, and will cause payments to fluctuate more than a traditional mortgage.

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RELATED FAQS
  1. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  2. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  3. If my mortgage lender goes bankrupt, do I still have to pay my mortgage?

    Yes, if your mortgage lender goes bankrupt you do still need to pay your mortgage obligation. Sorry to disappoint, but there ... Read Answer >>
  4. Is there any time I would want to have a zero-principal mortgage?

    As a general rule, entering a zero principal mortgage, or what is commonly referred to as an "interest-only mortgage", is ... Read Answer >>
  5. I've come into a large amount of money. Should I invest it or pay off my mortgage?

    There is no simple answer to this question as it depends on a number of key factors, namely the aspects or criteria of your ... Read Answer >>
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    Understand what the loan to value ratio is, how the ratio is calculated and learn how it has an impact on your mortgage payments ... Read Answer >>
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