Q.: Can you please explain what an interest-only mortgage is? – V.S., via email
A.: An interest-only mortgage is a loan on which, for a set term, the borrower pays only the interest due on the principal. The principal balance remains unchanged. Interest-only loans represent a somewhat higher risk for lenders, and therefore they carry a slightly higher interest rate. The reason most people take out interest-only mortgages is that these loans require the smallest monthly payments. But equity does not build unless the house rises in value. Interest-only mortgages tempt people to buy more house than they can afford and gamble on the outcome.