The American dream is to own a home. But high home prices may put the dream out of reach. To make monthly mortgage payments more affordable, many lenders are now offering a mortgage that allows you to (1) pay only the interest on the mortgage during the first few years of the mortgage term or (2) make only a specified minimum payment that could be less than the monthly interest on the mortgage.
Whether you are buying a house or refinancing your mortgage, this information can help you decide if an interest-only mortgage payment, called an I-O mortgage, or an adjustable-rate mortgage, called a ARM, with the option to make a minimum payment, a payment-option ARM, is right for you. Lenders have a variety of names for these loans, but keep in mind that with I-O mortgages and payment-option ARMs, you could face "payment shock." Your payments may go up a lot, as much as double or triple, after the interest-only period or when the payments adjust.
In addition, with payment-option ARMs you could face negative amortization. Your payments may not cover all of the interest owed. The unpaid interest is added to your mortgage balance so that you owe more on your mortgage than you originally borrowed.
