The popularity of exotic mortgages

The housing market is undoubtedly cooling off, and interest rates are on the rise. People who are looking to buy a home or just want to refinance their current mortgage are becoming more and more interested in non-traditional or “exotic” mortgages.

These exotic mortgages differ from the fixed-rate standard mortgages in that they usual offer extremely low introductory interest rates and let you pay a minimal amount every month.

The article, “Exotic mortgages remain popular despite their increasing risks,” by Rachel Koning Beals from MarketWatch of The Wall Street Journal, discusses these well-liked mortgage products.

“Such loan innovations allow home buyers to put little money down and make low monthly payments. They've also poured fuel on one of the hottest and longest housing booms in the nation's history.”

“But in the wake of the Federal Reserve's push to take away easy money, low interest rates and red-hot home prices have faded away. With them went the main conditions that made interest-only and other flexible mortgages worth their risks. So the consumer's love affair with such loans is drawing to a close now, right? Wrong. “

Many people would assume that with the changing market, these exotic mortgages would have become less popular because people would not want to take the risk. But that is actually quite far from true.

“Far from just another financing fad, exotic mortgages have become such a fixture on the U.S. housing landscape that they've proven to be a key lever for many borrowers even as they have become a greater danger at the same time.”

“‘In our changing market, from unprecedented low rates to a steady rising of interest rates, these varieties of loan programs have become much more popular,’ says Bill Callanan, a partner with Mortgage Management Systems, a San Francisco mortgage broker. ‘But if you're scraping nickels together, they're not for you.’”

Long-term, fixed-rate loans are still the most popular mortgage products on the market, but people may be turning to alternative mortgages because it is the only way they are able to afford a home.

“Mortgage bankers concede that demand for alternative loans that reduce payments isn't as brisk as 12 months ago, in part due to the warnings. But marketing remains aggressive and mortgage lenders continue to compound the options: qualifying buyers now face an often confusing buffet of loans with terms of anywhere from 1 to even 50 years. Some of them can result in negative amortization -- an increasing monthly principal balance. “

“The complexity of these options can leave less-sophisticated borrowers at the mercy of lenders, who consumer groups charge are all too willing to entice home buyers with looser financing so that they may go after properties well out of their conventional reach.”

The most important thing to remember when dealing with a new mortgage, whether it be traditional or exotic, is to do your research.

You should know exactly what you are getting yourself into both financially and emotionally before signing those papers.

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