October 7, 2009

What Is an Unconventional Loan, and Why Should You Care?

Let's answer the last part of the question first. If you have any kind of loan on your house, you should care about unconventional loans because those are the kinds of loans that are most likely to get you into trouble, whether or not you are underwater on your current home.

The easy answer the first part of the question is that an unconventional loan is anything that isn't a conventional loan. In a conventional loan, the interest rate and the term of the loan are fixed. This means that you know ahead of time how much you have to pay each payment period (typically each month), and how many times you have to do that until the loan is paid off. You pay the same amount each month, and every month you pay off a little bit of the original amount. At the beginning, you are paying almost all interest, and toward the end you are paying almost all principal. A conventional loan is also called a fixed loan. The classic conventional home loan is a 30-year fixed interest rate loan.

An unconventional loan is anything else. One type is the adjustable rate mortgage or ARM. The rate may start off low, but could go lower or higher depending on many factors. The bottom line is you don't know how much you will pay later on. Two other types popular unconventional loans include an interest only loans, and loans with aballoon payment (a big payment at the end of the loan period).

Unconventional loans can work for you, but you have to do your homework to figure out what surprises they may have for you. If you are underwater on your mortgage, you should review your loan documents to see if you have to deal with one or more of the following:

1. An interest rate that may change in the future.

2. A loan where you only pay interest and the principal never goes down.

3. A loan with a big payment due at the end.

4. A loan where the lender can change the amount you pay if certain conditions happen.

If you find out you have one or more unconventional loans, do so planning so that the loan doesn't surprise you and put you at risk for foreclosure.

For more information on loans and loan terms, visit the Federal Trade Commission.

No comments:

Post a Comment