First, most interest-only mortgages do not have a fixed rate conversion option, meaning when the interest-only period expires, the interest on your loan becomes adjustable (it adjusts on an annual basis for the remaining life of your loan) — potentially at much higher rates than today. Second, if the value of your home declines, you will need to make up the difference when you sell your home. Third, paying only the interest on a mortgage does not allow you to build any equity in your home-meaning home "ownership" is more like home "leasing."
Mellody's Tip: Interest-only loans are most suitable for people who only plan to stay in their home for a few years. However, while an interest-only loan allows a buyer to qualify for a larger mortgage and a more expensive home, biting off more than you can chew is rarely a wise financial decision.
Again, keep in mind the interest-only portion fluctuates with the Prime rate and is very sensitive to rate increases. It is important, if you choose this route of financing, to pay down the principle along the way as well. Also, many interest-only mortgages come with a pre-payment penalty. So, if you decide to chip away at the principal with this type of loan, beware that you may face additional charges, often up to 2 percent of the principle.
E-mail Mellody with your personal finance questions.
Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.