Initial payments may be lower than the cost of interest, in which case the unpaid interest is added to the principal. This type is good for first-time buyers who expect their incomes to rise during the course of the mortgage. The changing rate can affect the monthly payment, the term, or the outstanding principal. Some plans change the rate more frequently than they change the payments. This can result in underpayments on interest that are then added to the outstanding balance.
Countless variations are possible.
The wraparound mortgage allows the buyer to assume the balance of a lower-rate mortgage from the seller, making payments to amortize both that original mortgage and the additional amount being borrowed at prevailing rates. This mortgage reduces the overall interest rate on the total amount. In return for a reduced interest rate, the lender receives a set portion of the amount by which the home has appreciated when it is sold or the loan is paid. Because the final value of the home cannot be determined in advance, additional interest can be due if the value has not appreciated sufficiently. A reverse mortgage really is not a mortgage at all, but a way of getting monthly payments in return for some of the equity in a house.