Exotic Mortgage

Definition of 'Exotic Mortgage'


A type of home loan that offers lower monthly payments in the first few years, but is considered high-risk because of its difficult-to-understand terms and higher future payments. People often use exotic mortgages to buy more expensive homes than they otherwise could afford. Homeowners may also refinance into exotic mortgages to lower their monthly payments. Exotic mortgages, also called non-traditional mortgages, make up a small part of the mortgage market.

Investopedia explains 'Exotic Mortgage'



With an exotic mortgage, payments can increase dramatically after the initial period to twice or more the initial payment. Their payment schedules can also cause borrowers to end up owing more than they originally borrowed.
 
Interest-only mortgages are one type of exotic mortgage. Instead of requiring the homeowner to pay both principal and interest, they only require interest payments for the first few years, which means a smaller monthly payment. These mortgages typically have adjustable interest rates, so the initial monthly payment can jump if the interest rate increases, in addition to spiking when the interest-only period ends and principal repayment is required.
 
Another type of exotic mortgage is the payment-option adjustable-rate mortgage. This loan allows homeowners to choose a different amount to pay each month. They can even choose to pay less than the interest owed.
 
Aside from the problems of unpredictable monthly payments after the introductory period and difficulty in understanding their terms, a major problem with exotic mortgages is that if homeowners originally took them out because they could only afford a very small monthly payment, they may not be able to afford the future payment increases. In a declining housing market where home prices are decreasing, homeowners cannot sell their homes or refinance to get out of their no-longer-affordable exotic mortgages. Their only choices are a short sale or foreclosure. This scenario occurred regularly during the 2008 housing crisis.




comments powered by Disqus
Hot Definitions
  1. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  2. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  3. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
  4. TIMP (acronym)

    'TIMP' is an acronym that stands for 'Turkey, Indonesia, Mexico and Philippines.' Similar to BRIC (Brazil, Russia, India and China), the acronym was coined by and investor/economist to group fast-growing emerging market economies in similar states of economic development.
  5. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  6. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
Trading Center