ABSTRACT
Alternative mortgage instruments are mortgage plans designed to accommodate, better than traditional mortgages, the current needs of residential mortgage borrowers, mortgage lenders, or both. The long-term fixed-rate, fixed-payment mortgage became the prevalent type in the United States in the 1930s and served both borrowers and lenders well as long as price and interest rate movements were relatively small. Mortgage plans with lower initial monthly payments need not increase rate flexibility and could result in monthly payments to the depository institution smaller than necessary to cover the monthly interest cost of the loan. Adjustable-rate mortgages are mortgage plans whose contract or coupon interest rates change periodically after origination according to some agreed-upon conditions. Any upward adjustment in the mortgage interest rate that is not accompanied by a change in the monthly payment sufficient to amortize the loan over the remaining life of the loan may require negative amortization, i.e., an addition to the outstanding loan balance.
