If you haven’t qualified for regular loans or mortgages, you can apply for a non-traditional mortgage. But what actually is a non-traditional mortgage?
Non-Traditional Mortgage: Definition & Types
Definition
The non-traditional mortgage is a type of home loan that doesn’t fall into the regular category of home loans. Unlike a traditional mortgage or loan, a non-traditional loan doesn’t require a certain credit score or DTI (Debt-to-Income). Besides, when it comes to loan repayment, non-traditional mortgage differs from other traditional types of loans.
For example, if you take a regular mortgage loan, the amortized period will be around 15 to 20 years. You’ll have to pay installments, including interest and principal, throughout your loan period. But in the non-traditional mortgage, it’s different. You’ll have more flexibility than traditional mortgages. Besides, in some cases, you’ll have to pay interest for a certain time, and when the interest payment period is over, you only have to repay the principal.
However, this non-traditional mortgage is a bit risky for both the borrower and lender. Because the interest rate of this type of mortgage is a bit higher and doesn’t have a standard amortization period.
How does the Non-Traditional Mortgage Function?
The function of the traditional mortgage and non-traditional mortgage is almost similar but differs in payment system, amortization period, and flexibility.
As I mentioned earlier, in a non-traditional loan, you’ll have the flexibility of how you will repay the loan. For example, if you want, you can avoid paying the principal and interest together. Besides, according to the loan type, you may have to pay the interest for a fixed period, and when the interest is paid, you only have to pay back the principal. Again, in some cases, you’ll have the power to choose how much you’ll repay every month.
3 Types of Non-Traditional Mortgages
1. Interest-Only Mortgages
In this type of non-traditional mortgage, you’ll have to pay interest for certain years, usually 10 years. And when you’re done paying the interest, you’ll have to repay the initial loan.
Again, most interest-only mortgages are ARMs or adjustable-rate mortgages. It means that the interest rate will increase or decrease every year. However, you can select fixed-rate mortgages over ARMs. But unfortunately, this type of interest-only residential mortgage is rare.
2. Balloon Loans
This is a short-term home loan where you’ll have to pay a certain amount when the mortgage matures. According to the loan structure, you may have to pay interest only or just principal before the mortgage matures. However, these amounts won’t be enough to completely repay your mortgage.
3. ARMs
In ARMs, borrowers have the freedom to choose the repayment option. For example, borrowers can select minimum & overpayment, amortization period, interest-only payment, etc. However, this type of mortgage is a bit risky for borrowers because the interest can go up. As a result, you may have to repay more than you’ve expected, which could increase your debt.
Conclusion
If you’re looking for a flexible mortgage, go for a non-traditional mortgage. However, as there are some risks of high interest and debt increase, you should do your homework and decide on your own before taking the non-traditional mortgage route.
