BOSTON, May 31, 2005
Mortgage 'Perfect Storm' Brewing?
Ray Martin Warns Of Dangers Of 'Interest-Only' Mortgages
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Play CBS Video Video Interest-Only Loans In the midst of the current real estate boom, many Americans are buying homes with so called interest-only loans. The Early Show's financial advisor Ray Martin explains how they work.
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Ray Martin and Hannah Storm (CBS/The Early Show)
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Special Report Ray Martin's Money Tips The Early Show money maven offers advice to keep your financial house in order.
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.
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