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Risky Home Loans Are Making a Comeback. Are They Right for...

One popular loan is the interest-only adjustable rate mortgage, with which a borrower pays only the interest for a period before the rate resets and principal becomes part of the payment. “We all have time on our hands because business is so slow,” he said. “The worst it could be was 8.75 percent, and saving $25,000, I could put that money somewhere else.” The family’s plan, Mr. John said, is to make principal payments in addition to the interest, with the goal of reducing his mortgage faster than he would with a 30-year fixed-rate loan. The price falls will be higher because of the expectation that prices always go up.” And not paying principal during the initial interest-only period just makes the amortization period of the loan shorter, said Richard K. Green, a professor of real estate at the University of Southern California. In other words, instead of paying off a mortgage over 30 years, the borrower is paying it down over 20 or 25 years, increasing the amount of the payments after the interest-only period ends. “It’s not to just get someone into a house,” he said. The risk of a change in a person’s financial circumstances could affect the ability to repay interest-only loans. They were the first to lose their jobs.” Today, though, even qualified borrowers need to be aware of the loans’ risks. After the initial interest-only period resets, the payment can go up as high as 50 percent, and some people cannot afford that, Dr. Green said. “For the first-time home buyer, I say stay away.”