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The Ins and Outs of Exotic Home Loans
By Jonathan Haeber
CMR Columnist
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If you were born after the 1960s, then you know that the post-60s generations do things a lot differently. Namely, we like to borrow a lot. And to be frank, we don't mind it all that much, because we assume we'll be able to afford it later. Such has been the case with non-traditional home loans, only recently used in unprecedented numbers.
"Flexible-payment options used to be the province of the very wealthy," writes Ron Schere, Staff Writer for the Christian Science Monitor. For example, there was a time when only 1.5% of home buyers used interest only mortgages. But things have changed: last year, according to LoanPerformance (a San Francisco research firm), 1/3 of those who took out a home loan went with an interest only mortgage.
The Dozens of Mortgages from which to Choose
Interest only mortgages aren't the only non-traditional loans out there. Today, we have dozens of different mortgage types. Some are less risky than others. One of the most dangerous mortgages is the "negative amortization" home loan. This exotic loan means that your payments are actually less than the interest accrued during that payment term. In simple terms, your loan amount increases and puts you even more into debt.
Exotic Home Loans May Not Be a Bad Thing for Everyone
True, there are benefits to exotic mortgages. For those of us who are unfortunate enough to live in an area with high-value real estate, these loans may be the only route towards owning a home.
People who may benefit from a non-traditional loan include:
- Recent college graduates who are more likely to experience income growth over the short term
- Those who live in areas with a lot of potential for price appreciation
- Those who don't plan on owning their home for more than five years
Know Your Risks
It's important to note the risks associated with exotic loans. If you're not willing to accept the fact that you may lose money on your investment, then you should reconsider your home loan. If you are confident in your ability to make the payments both now and in the future, and you feel that your income will grow, then an exotic loan, like an interest only mortgage, may be the right option for you.
The average life of a loan, according to mortgage company owner Teresa O'Dette, is only four years. "Why go 30-year [fixed]?" asks O'Dette. She has a point. Why commit to a 30-year rate if you're not sure you'll own a home for the full 30 years.
Sources
"Exotic Mortgages Tempt More Buyers," Christian Science Monitor
About the Author
Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home, and took a self-taught crash course in home mortgages.
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