Peter Coy, Business Week (by way of National Association of Realtors)

(May 18, 2005) —   Interest-only loans have risen from 1.5 percent of all mortgages in 2001 to 31 percent as of last year, according to LoanPerformance, a real estate information firm based in San Francisco.

The growth of interest-only loans is a concern because the sheer number of borrowers indicate that people are turning to the mortgage product to purchase homes they otherwise could not afford, including families who want to get into expensive housing markets.

The product is ideal for wealthy households, people with irregular incomes and strong self-discipline, and young professionals fresh out of school who anticipate a sharp increase in their income, all of whom likely would be able to handle a 50 percent increase in their monthly payment once the principal payments kick in and interest rates increase.

Most interest-only loans carry adjustable rates. A 30-year loan is likely to have an interest-only feature that ends after 10 years, which means the entire principal must be paid off over 20 years.

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