What Is an Exotic Mortgage?

An exotic mortgage is a type of home loan that offers lower monthly payments in the first few years but can be risky because of its often difficult-to-understand terms and higher future payments. People sometimes use exotic mortgages to buy more expensive homes than they could oth🔯erwise afford.

Homeowners may also refinance into exotic mortgages to lower their monthly payments. Also ౠcalled non-traditional mortgages, exotic mortgages were once more popular but make up only aꦇ small part of the mortgage market today.

Understanding Exotic Mortgages

A big part of a mortgage's cost is the interest you pay over the life of the loan. As such, borrowers are always looking for the lowest possible rate. In high interest rate environments, that may be difficult. In such cases, borrowers can turn to mortgages that are not the standard 30-year fixed mortgage; ones that offer lower rates.

Exotic mortgages consist of various types of mortgages that initially offer a low rate, but that low rate comes with a catch: higher interest rates down the line. This may be beneficial to some borrowers, particularly those who don't see themselves living in the house for long.

It can, however, also cause payment shock to those who weren't expectingღ such high mortgage payments once the higher rate kicks in.

Types of Exotic Mortgages

Exotic mortgages come in several varieties, a🌳ll of which provide lower initial payments than regular mortgages do bu𓆏t at greater risk to the borrower. They include:

Interest-Only Mortgages

澳洲幸运5官方开奖结果体彩网:Interest-only mortgages are one type of exotic mortgage. Ins༺tead of the borrower paying both interest and a portion of the principal each month, as is the case with traditional mortgages, they require only interest payments for the first few years. That allows for a smaller monthly payment at the out🌟set.

These mortgages typically have adjustable interest rates, so the initial monthly payment can jump if the interest rate increases. It can also spike when the interest-only period ends and the borrower must start repaying the principal. As a result, the borrower's monthly payments could become unaffordable.

Payment-Option Adjustable-Rate Mortgages (ARMs)

Another type of exotic mortgage is a payment-option 澳洲幸运5官方开奖结果体彩网:adjustable-rate mortgage, also known as an 澳洲幸运5官方开奖结果体彩网:option ARM. With this type of loan, the homeowner can choose a different amount to pay each month—the regular full payment, an interest-only payment, or a payment that is even less than the ꦯinterest they owe.

In theory, this type of loan could be good for someone whose income fluctuates significantly from month to month. The danger is that any interest they don't pay is simply added to the principal they owe so that they ultimately end up paying interest on the interest.

Balloon Mortgage

A 澳洲幸运5官方开奖结果体彩网:balloon mortgage starts with low—or even no—monthly payments, but at a certain agreed-upon point, the borrower mu𓄧st make a large lump-sum payment to the lender. Typically, the balloon payment comes at the end of the mortgage and pays off any remaining debt in full. The danger here, of course, is that when the balloon payment comes due, the homeowner won't be able to come up with the cash.

Advantages 🤡and Disadvantages of Exotic Mortgages

The advantage of an exotic mortgage is that it can allow a borrower to purchase a home that they couldn't afford with a traditional mortgage.

The tradeoff is that they are taking on a co🅠nsiderable amount of risk in return for tho🐬se lower monthly payments. With either an interest-only or payment-option mortgage, their monthly payments will increase at some point, possibly dramatically, and become unaffordable.

With a balloon mortgage, they will need to come൩ up with a significant amount of cash when their balloon payment comes due.

If all goes well, everything may work out fine. However, a job loss, an unexpec🐻ted financial emerg𝕴ency, or a decline in housing prices could make it impossible for the borrower to hold up their end of the bargain.

In that case, the lender could 澳洲幸运5官方开奖结果体彩网:foreclose on the property, and the borrower could lose their home. This scenario occurred regularly during the 澳洲幸运5官方开奖结果体彩网:2008 housing crisis.

In the aftermath of the housing crisis, some kinds of exotic mortgages were made illegal. Others simply fell out of favor as 澳洲幸运5官方开奖结果体彩网:mortgage rates dropped to hi🌠storically low levels, making exotic loans less competitive. But some remain available and they could see a resurgence in a future housing market.

The Bottom Line

While it can be great to get a low interest rate on a mortgage, make sure you fully understand the terms and structure of your loan. You don't want to find yourself in a situation where you're enjoying savings for a while but then can no longer afford your mortgage, resulting in you having to sell your home, or worse, end up in foreclosure.