Alternative Mortgage Instrument (AMI)

What Is an Alternative Mortgage Instrument (AMI)?

An alternative mortgage instrument (AMI) is any residential mortgage loan that deviates from standard mortgage practices. For instance, it may be a mortgage that is not fixed-rate, fully amortizing, has monthly or periodic payments, or a standard term of repayment.  Sometimes, an AMI is a loan with real property as collateral with the money being used for some other purpose than purchasing the property.

AMIs would be considered a type of nonconforming loan. A balloon mortgage, for example, is a type of AMI that requires a borrower to fulfill repayment in a lump sum.

Understanding Alternative Mortgage Instruments

The alternative mortgage instrument (AMI) includes those loans with variable interest rates and interest-only loans. Most AMIs are residential mortgage loans. These non-conventional mortgages often make it easier for consumers to purchase real estate by reducing monthly payment amounts and increasing the price borrowers can finance. They can provide more affordable housing for middle-class homebuyers. However, the benefit they provide may offset with the rising cost of the mortgage if the borrower's incomes do not grow at the same pace as mortgage payments.

These non-fixed interest loans have a variable interest rate which fluctuates over time. The rate has a basis of an underlying benchmark interest rate or index that changes periodically. As the benchmark moves up or down, the scheduled payments of the loan also move. AMIs do not have amortization of the principal. With amortization, the calculation of the total principal and interest spreads into equal payments over the life of the loan.

Another type of AMI is an interest-only mortgage. These loans reduce the required monthly payment for a borrower by excluding the principal portion from a payment. For first-time homebuyers, an interest-only mortgage also allows them to defer large payments into future years when they expect their income to be higher.

Other types of alternative mortgages include hybrid ARMs, variable rate mortgages, and option adjustable-rate mortgages (ARM), to name only a few.

Alternative Mortgage Instrument History

Alternative mortgage instrument loans first became popular in the early 1980s, when high-interest rates made home purchases out of reach for many first-time homeowners. Banks and savings institutions introduced a variety of alternative mortgages designed to reduce the homebuyer’s mortgage payment. These alternatives also helped the buyer finance a larger, more expensive home. 

As interest rates declined between 2001 and 2005, home sales and home values rose to record levels. Financial institutions responded with even more alternative mortgage loans, such as loans with a choice of monthly payments as in the option arm, low down-payment loans with up to 100 percent financing, loans with 40-year amortization schedules, as well as variable-rate mortgages, graduated-payment mortgages, and reverse-annuity mortgages. Some alternative mortgages originated for specific borrower situations. However, they are costly to originate and see little usage.