What is an Alternative Mortgage Instrument (AMI)?
An Alternative Mortgage Instrument (AMI) is any type of mortgage other than a traditional fixed-interest-rate, level-payment amortizing loan. AMIs come in various structures, offering flexibility to borrowers who might have non-traditional financial profiles or require adjustable terms. They typically cater to market fluctuations and different economic scenarios.
Examples of Alternative Mortgage Instruments:
- Variable Rate Mortgages (VRMs):
- Rates that adjust periodically based on a specific benchmark or index.
- Rollover Loans:
- Fixed interest rates over a short initial term, followed by a series of renewal periods where new fixed rates are set.
- Graduated Payment Mortgages (GPMs):
- Payments start lower and gradually increase over time, designed for borrowers expecting rising incomes.
- Shared Appreciation Mortgages (SAMs):
- The lender receives a portion of the property’s appreciation in value over a pre-defined period in exchange for lower initial rates.
- Adjustable Rate Mortgages (ARMs):
- Rates that adjust periodically based on a predefined margin and associated financial index.
- Growing Equity Mortgages (GEMs):
- Scheduled increases in monthly payments applied directly to the loan’s principal, reducing overall term length.
Frequently Asked Questions (FAQs)
Q: Who benefits most from an AMI?
- A: Borrowers with fluctuating incomes, those who plan to sell or refinance their home before rates increase, or individuals seeking lower initial payments may benefit the most.
Q: Are ARMs and VRMs the same?
- A: Not exactly. Both adjust rates periodically, but ARMs usually have capped rate increases, while VRMs adjust based on a financial index without fixed caps.
Q: How do GPMs handle the initial low payment?
- A: The lower initial payments result in negative amortization, where unpaid interest is added to the loan principal, increasing the amount owed over time.
Q: Are AMIs riskier than traditional mortgages?
- A: They can be, as they often involve changing payment amounts and interest rates, increasing uncertainty for the borrower.
Q: What are “reset periods” in context of AMIs?
- A: Reset periods refer to specific intervals where the interest rate or terms of the mortgage are recalculated, common in loans like rollover mortgages.
Related Terms with Definitions
- Amortization: The process of spreading out a loan into a series of fixed payments over time.
- Negative Amortization: Occurs when payments are less than the interest accruing, increasing the loan balance.
- Loan-To-Value (LTV) Ratio: The ratio of a loan to the value of an asset purchased.
- Interest Rate Cap: A limit on how much an adjustable-rate mortgage’s interest rate can change in a given period.
Online Resources
- Federal Reserve on Adjustable-Rate Mortgages: Federal Reserve Board
- Consumer Financial Protection Bureau (CFPB) on Mortgages: CFPB Mortgage Information
- Mortgage Calculator Tools: Bankrate
References
- Federal Reserve Board. “Consumer Handbook on Adjustable-Rate Mortgages.” Washington, D.C.
- “Consumer Finance Protection Bureau: Owning a Home.” CFPB.
- “Bankrate Mortgage Calculator.” Bankrate, LLC.
Suggested Books for Further Studies
- “The Mortgage Professional’s Handbook: Succeed in the New World of Mortgage Finance” by David Luna
- “Mortgage Management For Dummies” by Eric Tyson and Robert S. Griswold
- “All About Mortgages: Insider Tips to Finance Your Home” by Julie Garton-Good
Real Estate Basics: Alternative Mortgage Instrument Fundamentals Quiz
### What is an Alternative Mortgage Instrument?
- [x] Any mortgage other than a fixed-interest-rate, level-payment amortizing loan.
- [ ] A standard fixed-interest-rate mortgage.
- [ ] A short-term loan for house renovations.
- [ ] None of the above.
> **Explanation:** An Alternative Mortgage Instrument (AMI) encompasses any mortgage other than the classic fixed-interest-rate amortizing loan, offering various flexible repayment structures.
### What type of AMI allows for interest rate adjustments based on market conditions?
- [x] Adjustable Rate Mortgage (ARM)
- [ ] Fixed Rate Mortgage (FRM)
- [ ] Balloon Mortgage
- [ ] Reverse Mortgage
> **Explanation:** ARMs allow for interest rate adjustments periodically based on predetermined margins and economic indices.
### Which AMI involves the lender receiving a portion of the property's appreciation?
- [ ] Graduated Payment Mortgage (GPM)
- [ ] Growing Equity Mortgage (GEM)
- [x] Shared Appreciation Mortgage (SAM)
- [ ] Reverse Mortgage
> **Explanation:** In Shared Appreciation Mortgages, the lender receives part of the property's value increase over a set period.
### Which type of AMI features payments that start low and gradually increase?
- [ ] Adjustable Rate Mortgage (ARM)
- [x] Graduated Payment Mortgage (GPM)
- [ ] Interest Only Mortgage
- [ ] Fixed Rate Mortgage
> **Explanation:** GPMs are designed for borrowers expecting income increases, with low initial payments that rise gradually.
### What is a common risk associated with AMIs?
- [x] Payment and interest rate variability
- [ ] Guaranteed profit rates
- [ ] Fixed payments for life
- [ ] Unlimited borrowing capacity
> **Explanation:** AMIs often involve fluctuating interest rates and payments, introducing unpredictability into the borrower’s financial planning.
### What does the term "reset period" refer to?
- [x] Scheduled intervals where mortgage terms are reevaluated
- [ ] The period when the loan terms are signed
- [ ] The point at which a buyer first takes out the loan
- [ ] The period for compliance with HUD regulations
> **Explanation:** Reset periods are intervals where the terms of a mortgage, such as its rate, are recalculated.
### For which AMI do payments apply directly to the principal over time?
- [ ] Adjustable Rate Mortgage (ARM)
- [ ] Interest Only Mortgage
- [ ] Balloon Mortgage
- [x] Growing Equity Mortgage (GEM)
> **Explanation:** GEMs involve scheduled increases in monthly payments, which go entirely toward principal reduction, shortening the loan term.
### Which feature differentiates a Variable Rate Mortgage from a Fixed Rate Mortgage?
- [x] Adjustability of the interest rate
- [ ] Fixed monthly payments
- [ ] Single payment at maturity
- [ ] Government backing
> **Explanation:** A Variable Rate Mortgage has its interest rate adjusted periodically, unlike a Fixed Rate Mortgage which maintains a constant rate throughout its term.
### Who might prefer an Alternative Mortgage Instrument?
- [ ] Someone seeking the utmost stability in monthly payments
- [x] A borrower expecting financial growth in the near future
- [ ] Individuals seeking long-term fixed costs
- [ ] People adverse to property appreciation terms
> **Explanation:** Borrowers foreseeing income growth or planning to sell/refinance soon may benefit from the initial flexibility in AMIs.
### Which AMI establishes a series of renewable fixed rates after the initial term?
- [ ] Graduated Payment Mortgage (GPM)
- [ ] Growing Equity Mortgage (GEM)
- [x] Rollover Loan
- [ ] Fixed Rate Mortgage
> **Explanation:** Rollover Loans start with a fixed interest rate for an initial term and thereafter reset at subsequent intervals with new fixed rates.
