When does an Alternative Mortgage Make Sense?

The recent rise in short term interest rates has brought financial strain to misguided and mismanaged mortgage consumers. The media has of course spotlighted this issue and used it to fuel the negative sentiment toward and resentment of Mortgage Brokers. Don't get me wrong - those who know me well already know I agree with much of the critique of my own industry - but I also think the media likes to make examples in extreme cases.

The case for the traditional 30 year fixed (FRM) has always been safety from interest rate risk exposure. In other words, lock in now for 30 years, and you never have to worry if rates go up. You can refinance if rates go down. But even Alan Greenspan thinks this strategy can be wasteful for some consumers. What if you know you will move in a shorter period of time? Or at least think the odds are good? How about if you expect major changes to your income in the next few years? Have near-term financial goals outside of the home, like funding a college education or retirement plan? Statistics tell us that getting to the mid-way point in a 30 year mortgage is highly unlikely. Average loan duration is around 5.1 years.

Mortgage Planning explores alternative types of mortgage financing so that you can adjust the structure of your largest liability to make room for other goals. This may mean lower payments now, and higher payments later. It may mean less certainty in the future, or greater interest rate risk. It may also mean the difference between living 'house-poor' and achieving more of your financial goals. When weighing these risks, you need to also explore the probability that they would even matter. And what do you risk by being too safe?

For a more sterile example of why alternative mortgage products might make sense, see this short essay by the San Francisco Federal Reserve, especially the section titled: "Some motives for choosing alternative mortgages".

Everybody is different. Make sure you have proper guidance so you can fit your mortgage plan within your financial plan - and your life plan.