Alternative Mortgage Options
- Alternative mortgages put low-income earners into mansions they couldn't afford.mansion image by Felix Chen from Fotolia.com
A traditional mortgage is a property loan that has a fixed rate, fully amortizes (pays off), has the same monthly payment over the term of the loan and is based upon the applicant's fully documented income, credit and employment information. An alternative mortgage differs by one or more characteristics from the traditional mortgage. The Garn-St. Germain Depository Institutions Act of 1982, commonly called the deregulation of savings and loan institutions, opened the door to alternative mortgages. During the housing boom from 2000 to 2006, banks and other lending institutions fully exploited the act's deregulatory features by making dozens of alternative mortgages available. As a result of the high rate of foreclosures after 2006 and an ensuing reemergence of conservative lending policies, banks offered far fewer alternative mortgages after 2007. - The adjustable-rate mortgage, first permitted in 1982 by the Garn-St. Germain Act, is one of the few alternative mortgages readily available in 2010. An adjustable-rate mortgage changes periodically, often monthly, with changes to an underlying index with which it is associated. Usually adjustable-rate mortgages start out at a low monthly payment. Prior to 2006 lenders used the low payment to qualify borrowers for the loan; however, many lenders have since returned to a practice of lending only to borrowers who will qualify for what the anticipated maximum payment might be.
- An interest-only or IO mortgage is a loan on which only the interest is paid during an initial period of 3 to 10 years. After the initial period the loan resets and becomes fully amortized over the remaining loan term. Negative-amortization or neg-am loans required payments below even the interest due on a loan. Each month the unpaid interest would then become subject to interest itself, resulting in a principal loan balance that would grow larger every month. The loan would either reset after some period of time, requiring a much larger monthly payment to cover the "negative" amortization that had taken place, or would all be due at once in a balloon payment. Neg-am loans have been outlawed in some states. Both loans types are available in some places, but not readily so.
- Low- and no-documentation loans reduced the type and amount of personal financial information a borrower had to provide to a lender in order to qualify for a loan. In stated-income loans, a type of low-documentation loan, borrowers proved they were employed but did not provide proof of their exact income. In no-doc loans, borrowers didn't even have to state their income or prove they were employed. Low-doc and no-doc loans virtually disappeared by 2008.
- A hard-money loan is a loan from a private lender not regulated as a bank or other lending institution. Hard-money lenders frequently only look at the collateral--the property--value in deciding how much money to lend. They tend to charge much higher interest rates than banks and lend for shorter terms. While some hard-money lenders advertise on the internet and elsewhere, many operate only through word of mouth.
