The sting of rising home prices has pushed some buyers to consider interest-only loans. Their appeal comes in smaller monthly payments. However, there are some real economic gambles that go along with these loans.

Since you're only paying interest on the loan for a set period of time (in some cases up to 15 years), you're not building up equity in your property. You might think that's OK if you don't plan to stay long, but there's a sizable risk.

If the value of the property drops and you sell, you have to make up the difference between the market value and the loan. Assuming you got into the loan with a low down payment (in some cases just 3% is required) and have built no additional equity, this could be financially devastating.

Also, these interest-only loans are most common in an adjustable rate form. So high monthly paymerits are a possibility as rates rise.

For more details on the pros and cons of interest-only loans, go to www.hsh.com/interest-only.html.

Copyright Southern Progress Corporation Dec 2004
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