According to mortgage risk analysis firm Loan Performance, a rapidly growing percentage of mortgages are interest only. Interest only mortgages allow a buyer to stretch their budget and afford more house than they could afford with a traditional mortgage.
In 2004, 31 percent of all mortgages were interest only, up dramatically from 13 percent in 2003 and 6 percent in 2002.
With an interest only 30 year mortgage, there is typically no amortization of the principal for the first 10 years -- but the entire principal has to be repaid in the last 20 years. This results in astronomically higher costs later in the life of the mortgage.
I was shocked to read that over 50 percent of new mortgages issued in Georgia in 2004 were of the interest only variety. With pensions being phased out, Social Security in doubt and now interest only mortgages becoming increasingly popular, one has to wonder what the future will be like for today's young families when they reach retirement age.
A Growing Tide of Risky Mortgages [Business Week]