What Is an Alternative Mortgage?

An alternative mortgage agreement is any type of mortgage offered by lenders that differs from the typical mortgage loan offered to borrowers. The typical mortgage loan generally requires the borrower to pay an initial down payment, after which regular payments are made to pay off the balance of the loan along with fixed interest payments. By contrast, an alternative mortgage may consist of lower initial payments, adjustable interest rates, and many different options allowing more suitable financing options for the home-buyer. One main drawback to these types of arrangements is that they could lead to irresponsible borrowing on the part of the homeowner.

Many home buyers cannot afford the significant costs associated with buying a house. As a result, they require loans known as mortgages. A mortgage lender fronts the majority of the cost of the home, which the lender must pay back in regular installments that comprise, in a standard mortgage, both a portion of the principal and interest at a fixed rate. Since not even these terms afford enough financial help for some buyers, an alternative mortgage may have to be considered.

The most common form of alternative mortgage is an adjustable-rate mortgage, or ARM. In an ARM, the interest rates paid by the homeowner change over the term of the mortgage. Generally, these rates start low and then gradually increase as the loan progresses. With some loans, they are tied to bank interest rates. Basically, ARM's allow borrowers to pay less at the beginning of the loan when they might have fewer funds to contribute.

There are other ways that an alternative mortgage can help out certain types of home buyers. Low-doc mortgages refer to mortgages that are granted to borrowers without requiring from them documentation such as income levels or assets. These mortgages usually include higher interest rates to compensate for the lack of financial information. In addition, some mortgages can help out buyers with construction costs if the house in question still needs to be built.

While an alternative mortgage can seem like a great deal at first, potential home buyers must be aware of the ways in which such plans can be problematic. For example, an adjustable-rate mortgage can overwhelm a homeowner in later years if the payments rise above income levels. As a matter of fact, any alternative financing that offers borrowers a break in the early stages of the mortgage can be deceiving. At some point, the full amount of the loan must be paid back, and a homeowner that can't live up to this requirement may be faced with foreclosure.