You go to the zoo, and admire exotic and dangerous animals. Would you bring one of them home? Probably not. In recent years, mortgage lenders have had to develop non-standard, or "exotic", mortgage products that enable homebuyers to buy homes selling for very high prices. Buying a home, especially a first home, is very exciting. It's easy to accept a mortgage that enables you to realize your dream, but exotic mortgages may be costly in the long run.
Exotic Mortgage Loans: Paying the Price as Interest Rates Rise
ARM mortgages have become somewhat standard in the mortgage marketplace. Current interest rates are rising, and adjustable rate mortgages are adjusting upward. Homeowners can experience financial problems due to payment increases. It's likely that some borrowers had no idea of how their payments could change when they signed their mortgage papers. If you're refinancing, here are some things to look out for:
- Negative amortization This means that payment of a portion of interest is deferred each month, and added to the unpaid principal balance. The balance of your mortgage increases, rather than decreases, over time. This can be highly risky when real estate markets slump.
- Interest only payments Your principal balance does not decrease, as you are paying only interest on your mortgage. These types of loans are great for getting into the home you want, but over time, you will end up paying more.
- Prepayment penalties or restrictions Exotic loan products may offer very low rates for an initial period, and then are subject to adjustment according to prevailing interest rates. To prevent borrowers from refinancing prior to the adjustment, some loans may contain language prohibiting early payoff, i.e., through refinancing.
When refinancing, or taking out a mortgage for any reason, it's important to know all of its terms. Your lender will gladly answer your questions, but the volume of paper can tempt you to sign without careful review of your loan documents. It's a good idea to make notes, so you won't forget to ask about matters that concern you.
