A mortgage loan that deviates from standard mortgage practices is an alternative mortgage instrument (AMI). For instance, the mortgage may not have a fixed interest rate, a fully amortizing structure, monthly or periodic payments, or a standard term of repayment. Sometimes, an AMI is a loan secured by real estate as collateral, but the funds are used for a purpose other than purchasing the property.

What Is an Alternative Mortgage Instrument (AMI)?

Alternative mortgage instruments (AMI) are mortgages with non-standard terms.

Unlike conventional loans, AMI loans feature alternative repayment terms, variable interest rates, and non-amortizing interest.

Interest-only, balloon, and adjustable-rate mortgages are prevalent examples of AMIs.

Understanding About Alternative Mortgage Instruments (AMIs)

The term "alternative mortgage instrument" (AMI) is used to refer to the loans which do not adhere to conventional mortgage standards. Conventional loans, unlike Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans, are not part of any government-backed lending program. Consequently, AMI lending can encompass both loans with variable interest rates and interest-only loans. The majority of AMIs are residential mortgage loans and are classified as nonconforming loans, meaning that eligibility requirements, pricing, and features can vary by lender.


A balloon mortgage is a type of AMI in which the borrower is required to repay the loan in one lump sum.

By reducing the monthly payments and increasing the price that borrowers can finance, then these nonconventional mortgages often make it easier for consumers to buy real estate. They can provide middle-class homebuyers with more affordable housing. However, if the borrower's income does not increase at the same rate as mortgage payments, the benefit may be offset by the rising cost of the mortgage.

These loans with variable interest rates have an interest rate that fluctuates over time. The rate is based on a periodically changing underlying benchmark interest rate or index. As the benchmark rises or falls, so do the loan's scheduled payments. AMIs do not have principal amortization. With amortization, the calculation of the total principal and interest is divided over the life of the loan into equal payments.

Payment-option Negative amortization is possible with AMI loans if the minimum payment is less than the interest owed.

AMI History

AMI loans first gained popularity in the early 1980s, when high interest rates prevented many first-time homeowners from purchasing a home. Banks and savings institutions introduced a variety of alternative mortgages intended to lower the monthly mortgage payment of homebuyers. These options also assisted the purchaser in financing a larger, more expensive home.

As interest rates fell from 2001 to 2005, home sales and values reached all-time highs. In response, financial institutions introduced 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, variable-rate mortgages, graduated-payment mortgages, and reverse-annuity mortgages. Some alternative mortgages were designed for particular borrower circumstances. However, they are expensive to produce and have limited demand.

Examples of AMI Loans

The most prevalent type of AMI loan is the adjustable-rate mortgage (ARM). With an adjustable-rate mortgage, the homebuyer pays one low fixed rate for a predetermined time period. The rate is then adjusted based on the underlying benchmark rate. Throughout the life of the loan, the rate may be subject to periodic adjustments.

Say, for instance, you have a 10-year adjustable-rate mortgage (ARM) with a 3.25 percent interest rate for the first decade of the loan. At the conclusion of the 10-year period, your mortgage rate will be recalculated based on the underlying benchmark rate. If the rate falls below 3%, your loan's interest rate will decrease. If instead the benchmark rate is 4.25 percent, your mortgage rate will increase. Changing interest rates on an adjustable-rate mortgage can increase or decrease your monthly payment.

If you have an ARM and are concerned about a significant increase, you may wish to investigate mortgage refinance rates prior to the adjustment of your rate.

A second form of AMI is the interest-only mortgage. These loans reduce the borrower's required monthly payment by omitting the principal portion of the payment. An interest-only mortgage allows first-time homebuyers to defer large payments until years in which they expect their income to be higher.

Other types of alternative mortgages include, to name a few, hybrid ARMs, variable-rate mortgages, and option ARMs.

AMI: Pros and Cons Lending

AMIs could make purchasing a home easier for some borrowers, particularly on a competitive housing market. The possibility of a lower down payment requirement compared to a conventional mortgage loan could make purchasing a home easier for those with fewer liquid assets. They may also appeal to someone who is just starting out in his or her career and is not yet earning a great deal of money. If they expect their salaries to rise over time, they may be able to afford the potentially higher monthly payments associated with an ARM or an interest-only loan.

Choosing an AMI loan over a conventional or government-backed loan has some disadvantages. Since AMIs are typically nonconforming loans, lenders may impose stricter credit score or income requirements. Therefore, approval is not a given.

Moreover, borrowers must consider the associated costs. Despite the fact that an ARM may have a low initial interest rate, the mortgage could quickly become unaffordable once the interest rate adjusts. This presupposes that mortgage rates will increase significantly relative to when the borrower purchased the home. Refinancing can provide a "out," so to speak, but it can be time-consuming, and the borrower is responsible for appraisal and closing costs.

Before purchasing a home, compare the top mortgage lenders to find a loan that meets your needs and fits your budget.

What are mortgage instruments?

A mortgage instrument is a document that imposes a lien or encumbrance on the property securing a mortgage debt. Mortgage-related instruments include mortgage loans, trust deeds, and security deeds.

What is a substitute mortgage?

A non-conventional mortgage is any mortgage that deviates from the standard home loan. Alternative mortgages may have variable interest rates rather than fixed interest rates, or they may have higher interest rates than other types of home loans.

What does AMI mean in terms of mortgages?

AMI can be used to refer to alternative mortgage instruments when discussing home loans. It can also refer to the area's median income, which the Federal Housing Finance Agency uses to determine conventional loan limits (FHFA).