Mortgage 'Perfect Storm' Brewing?

In the midst of the current real estate boom, many Americans are buying homes with interest-only mortgages.

But The Early Show financial adviser Ray Martin warns many people are playing with financial fire when they choose that option.

He explains that interest-only mortgages are typically adjustable-rate loans in which the borrower pays interest only for a specified period of time.

"The attraction here for home buyers," Martin observes, "is that, all things being equal, an interest-only mortgage can be hundreds of dollars less per month in the initial payments."

But, he continues, problems could crop up later.

He cites a $300,000 loan as an example.

At a fixed rate of 5.88 percent, a common 30-year fixed rate, interest-and-principle mortgage would require a monthly payment of $1,738.

But with an interest-only plan, it would carry monthly payments of only $1,335 at first, but those would jump to $1,933 when principle starts kicking in after six years.

Martin says he sees two risks in interest-only mortgages.

"First," he says, "is the payment shock. After the initial interest-only period, two things will happen that will increase payments 40 percent to 70 percent.

"One is your interest rates will rise. Interest rates are on the rise and adjustable-rate mortgages will see higher interest payments.
  • Ellen Crean

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