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.

BREAKING DOWN '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.
RELATED TERMS
  1. Term Payment Plan

    An option for receiving reverse mortgage proceeds that gives ...
  2. Graduated Payment Mortgage

    A type of fixed-rate mortgage in which the payment increases ...
  3. Variable Rate Mortgage

    A type of home loan in which the interest rate is not fixed. ...
  4. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against ...
  5. Home Mortgage

    A loan given by a bank, mortgage company or other financial institution ...
  6. Accelerated Amortization

    Extra payments made towards paying down a mortgage principal. ...
Related Articles
  1. Credit & Loans

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  2. Home & Auto

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  3. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  4. Home & Auto

    5 Reasons To Save For A Big Mortgage Down Payment

    You may be anxious to buy a home, but taking time to save a large down payment has numerous advantages.
  5. Home & Auto

    5 Risky Mortgage Types To Avoid

    There are plenty of ways to end up with a bad mortgage. The risks of these five should make every homebuyer think twice before signing.
  6. Options & Futures

    Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  7. Home & Auto

    Understanding The Mortgage Payment Structure

    While a mortgageā€™s size and term set the baseline, the interest, taxes and insurance all influence the amount of the monthly payment.
  8. Credit & Loans

    Mortgage Basics: Costs

    By Lisa SmithPeople generally think about a mortgage in terms of the monthly payment. While that payment represents the amount of money needed each month to cover the debt on the property, the ...
  9. Insurance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  10. Credit & Loans

    Should I Consolidate My Two Mortgages?

    Consolidating your loans or mortgage may make sense for you, especially when interest rates are low. Here's what you should know.
RELATED FAQS
  1. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  2. Is there any time I would want to have a zero-principal mortgage?

    As a general rule, entering a zero principal mortgage, or what is commonly referred to as an "interest-only mortgage", is ... Read Answer >>
  3. What are the requirements to apply for a reverse mortgage loan?

    For homeowners of a certain age who wish to stay in their homes but are finding it costly, a reverse mortgage could be the ... Read Answer >>
  4. How does the loan-to-value ratio affect my mortgage payments?

    Understand what the loan to value ratio is, how the ratio is calculated and learn how it has an impact on your mortgage payments ... Read Answer >>
  5. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  6. If my mortgage lender goes bankrupt, do I still have to pay my mortgage?

    Yes, if your mortgage lender goes bankrupt you do still need to pay your mortgage obligation. Sorry to disappoint, but there ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center