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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