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. Federal Reserve Note

    The most accurate term used to describe the paper currency (dollar bills) circulated in the United States. These Federal Reserve Notes are printed by the U.S. Treasury at the instruction of the Federal Reserve member banks, who also act as the clearinghouse for local banks that need to increase or reduce their supply of cash on hand.
  2. Benchmark Bond

    A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. Also referred to as "benchmark issue" or "bellwether issue".
  3. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  4. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  5. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  6. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
Trading Center