Interest-only mortgages offer flexibility, carry risk

Rising home prices, low interest rates and increasing competition among lenders had brought a new type of mortgage to the market.

The “interest only” mortgage is growing in popularity. Such loans do not require home buyers to pay any principal – thus lowering their monthly payments.

However the loans carry a certain degree of risk.

The interest only mortage allows borrowers only to pay the interest portion of the loan. Borrowers do not have to pay any of the principal for the first three, five, or 10 years of the loan. That means they can lower their monthly payments by up to 25%. The loans can backfire if the value of the home does not increase, and the borrower ends up unable to meet payments when the principal comes due.

Interest only mortgages have been around awhile but they were mainly offered through brokerage houses to wealth investors. Now mortgage companies are offering them to just about anyone with a good credit rating.

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