Non – Traditional

What Is A Nontraditional Mortgage?

A nontraditional mortgage is a one-of-a-kind loan that does not meet the criteria for a regular or even unorthodox loan. Nontraditional mortgages are typically easier to qualify for in terms of credit score and debt-to-income ratio (DTI), but they can be dangerous for lenders and consumers alike. These mortgages include unusual repayment arrangements, such as the ability to delay payments or pay only interest until the debt is paid off.

How a Nontraditional Mortgage Works

Nontraditional mortgages, for the most part, serve the same goal as traditional mortgages. The way unconventional mortgages are repaid is where they differ. Lenders often give some flexibility rather than amortizing the loan amount and offering you fixed installment payments during the payback duration.

Your payback periods will vary based on the sort of loan you have. You may be able to make interest-only payments for a period of time before paying the principal amount in full—or you may be able to defer paying principal and interest until your loan matures.

Types Of Nontraditional Mortgages

There are three primary types of nontraditional mortgage loans: interest-only loans, balloon-payment loans, and payment-option ARMs. Here’s how each one works.


Interest-Only Loans

As the name suggests, borrowers only have to make interest payments on their loan until a predetermined time, which can be as long as 10 years.2 At that point, the lender may amortize the loan over the remainder of the repayment period or require a lump-sum payment of the full amount.


Balloon-Payment Loans

Balloon mortgages are generally short-term home loans that require a large lump-sum payment when the loan matures. Depending on the structure of the loan, payments leading up to the maturity date may be interest-only or principal plus interest. However, these payments are usually not enough to get to a zero balance by the time the loan term is over. In some cases, you may even be able to defer both principal and interest; you’d simply pay the loan in full when it matures.


Payment-Option ARMs

With payment-option adjustable-rate mortgage (ARM) loans, lenders effectively allow borrowers to select how they want to pay down the loan. You’ll be given a number of options from which to choose, such as:

  • Traditional amortizing payments over 15, 30, or 40 years3
  • Interest-only payments
  • A minimum payment set by the lender
  • Payment of any amount that’s higher than the minimum
Because the interest rate is adjustable, this loan option typically starts out with a temporarily low interest rate. After the initial rate period expires, the interest rate can fluctuate based on market conditions.