Not Forever
Interest-only payment schemes almost never run for the entire term of the loan, even when a fixed-rate mortgage is the underlying instrument. Even the InterestFirst product only allows for interest-only payments for one-half of the total term. Interest-only payments more typically expire at the end of a set period, making them a frequent companion to "hybrid" ARMs. Once the interest-only period ends, your payment will rise to include both principal and interest.
Then and Now
Where interest-only payment methods were formerly used for income leverage purposes -- using the same income stream to buy a home while accumulating other assets -- today's loans aren't being pitched only to well-to-do, sophisticated investors. While "cash- flow" purposes are still common, another audience with a different need has developed.
In the past several years, low mortgage rates, affordable housing initiatives, and innovative financing options have served to drive perhaps millions of potential homebuyers into the marketplace. That new demand has, in many areas, outstripped the supply of desirable homes, leading to what is termed a "seller's market," in which a lot of potential buyers compete for desirable properties. That demand, in turn, has allowed sellers to ask more for their homes -- and get it. Buyers without significant income or asset strength may have found themselves outbid and out of the running for a desirable property. Affordability, helped by falling interest rates, was now compromised by rising prices.
