Exotic mortgages are all of those loans with unique clauses and structures. Interest-only, zero-down, and balloon loans are all examples of loans that have gained in popularity the last few years. Record low interest rates and rapid price appreciation has led to a mortgage industry that looks more like a savings and loan. But as interest rates rise and home prices settle or fall, the risk is building and many lenders are foreclosing on loans.

What Causes Risk

Zero-down mortgages are an easy way to get into the real estate market. These loans require a very minimal savings to purchase a home. But because of this, homeowners have very little home equity. Equity can be used as a financial cushion in case of unexpected spending such as:

• Medical bills
• Job loss
• Divorce

Huge expenses and nothing to cover them with requires assets to be sold. That get's us to our next point.

Falling Real Estate Values

Many homeowners who purchased the last few years bought at a market peak. For now, they are in the red on their real estate transaction. A homeowner in this situation that must sell now faces serious risk of financial ruin.

How to Limit Risk

Every homeowner must address their own financial situation, but one possible choice is to refinance out of an exotic mortgage and into a fixed rate loan. Long-term rates have been falling in the second half of 2006. But be careful: many loans carry prepayment penalties.

For more information on home loans visit www.bankrate.com or www.realestatejournal.com.