Nontraditional Mortgage Loans

Sophisticated financial needs demand sophisticated financial products, the Nontraditional Mortgage Loans. While many of the most exotic financial instruments of the past disappeared with the 2007 real estate collapse, today’s lenders continue to offer a variety of smart, flexible loan products, from adjustable rate mortgages to interest-only and balloons loans. Used sensibly, these products can be used as powerful financial tools. Let us help find the right one to put to work for you.

Adjustable rate mortgages

Although adjustable rate mortgages, or ARMs, are available from conventional, FHA, and VA loan programs, we consider them non-traditional products since only a small class of borrowers will benefit from them, and extreme diligence should be used when electing to finance a home with an ARM.

Unlike fixed-rate loans that keep the same interest rate throughout the loan’s lifetime, ARMs adjust periodically based on the movements of certain indices such as the Cost of Funds Index or 12-month Treasury Average.

ARMs are typically offered with a low introductory rate that adjusts to a higher rate, known as the marginally-adjusted rate, after the first adjustment period. The marginally-adjusted rate is the rate as determined by the index plus the lender’s margin, or percentage points added to the index rate. By law, the terms of an ARM are disclosed on the loan’s note and will show such features as the loan’s margin and caps. Caps are protective features that limit extreme adjustments in the loan’s rate. For example, a loan with a 2/5 cap cannot adjust more than two points during each adjustment period or adjust more than 5 points from its starting rate over the loan’s lifetime.

Because the loan’s rate may adjust throughout its lifetime, these loans are considered riskier for the borrower and therefore lenders incentivize adoption of these loans with interest rates lower than those offered to fixed-rate customers. Should interest rates rise, fixed-rate customers will be unaffected while adjustable-rate customers will see their interest rates adjust upward.

ARMs are therefore a gamble, with the borrower hoping interest rates remain flat or decline. These loans are best reserved for borrowers with a keen understanding of market movements and sufficient financial flexibility to absorb increased mortgage payments following an upward adjustment.

ARMs are also available as 5/1 or 7/1 loans. Such loans carry a five- or seven-year initial rate period, in which the interest rate and principal payment remains constant. This offers mediumterm security against interest rate adjustments.

Interest-Only loans

An interest-only loan is a loan product in which the borrower only pays on the interest of the loan. The principal remains untouched and will be due upon the loan’s maturity. Because the borrower is only paying on the interest accrued, monthly payments are considerably lower than more typical principal plus interest payments.

Since the entire principal balance of the loan is due upon maturity, this loan product is advisable only for those with substantial assets and financial flexibility. It is most common, however, for borrowers in interest-only loans to either sell the property outright or refinance it into a conventional loan program before the loan matures.

Used prudently, this high-risk product can be a valuable financial tool for a select pool of borrowers whose assets can afford them the benefit of low payments on high-balance loans.

Balloon loans

A balloon loan is a loan product that does not fully amortize, or pay itself off, over its lifetime. Its amortization schedule matches a loan with a longer term but matures much earlier. For example, a 30-due-in-5 has monthly payments identical to a 30-year fixed mortgage, but matures at the end of its fifth year. The entirety of the loan’s outstanding balance is due on its 61st month.

Because of this unique payment structure, balloon loans will often carry a lower fixed interest rate than their fully-amortizing counterparts. These loans make financial sense for borrowers capable of paying off the outstanding balance upon maturity, or for those who are able to sell or refinance the property before maturity.

On principle, Garvens Mortgage Group will not recommend or offer balloon mortgages unsolicited. These are high-risk products intended only for a select class of savvy borrowers.

Company NMLS ID # 1591 (; CO–Mortgage Company Registration, Churchill Mortgage Corporation, 104 S Cascade Ave. Ste. 201A, Colorado Springs CO 80903-5102, Tel 888-562-6200, Regulated by the Division of Real Estate
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