A combination of banking deregulation, the growth of the mortgage industry, and the recent housing boom has resulted in a proliferation of mortgage products available to prospective home buyers. Conventional fixed and variable interest mortgages, which traditionally have required a 20 percent down payment, have been joined by a number of government-backed and private mortgages requiring little or no down payment and available with or without "points," or lump sums paid up front in exchange for a lower interest rate.

One mortgage product which has become extremely popular all over the US is the interest-only mortgage, typically offering an unusually low interest rate, sometimes as little as 1.5 percent, and many combined with a balloon payment after an initial period. What many home buyers don't understand is that an interest-only loan typically has two interest rates: the one they pay during the life of the loan and the actual interest rate.

Here's how it works: Say a home buyer opts for an interest-only loan at 1.5 percent. On a 30-year loan of $100,000, the buyer would owe $125.00 in interest at the time of his first payment. But say the "real" interest rate is more like 6 percent, or $500.00 at the time of the first payment. The difference, or $375.00, would be tacked on to the principal of the loan, so that in a month the balance of the loan would be $100,375.00!

Interest-only loans never get paid off! - at least not by making the scheduled monthly payments. Many of them are combined with balloon payments which are either paid off or converted to a more traditional mortgage at a later date.

Mortgage lenders have succeeded in selling these mortgage instruments to home buyers by using the skyrocketing real estate prices as justification. What difference does it make if you add several thousand dollars to a $100,000 home when the home will be worth double the price in a year? Unfortunately, the old adage "what goes up must come down" is too true in real estate, and the softening of the real estate market around the country signals the beginning of the end of the boom, or "bubble," according to some.

So what does this mean to a homeowner with an interest-only mortgage? In the above case, the owner will have added more than $4,500 to the principal of the home (due to compounding). Say the home, instead of going up in value, goes down, to $85,000. In a year's time the homeowner will owe in excess of $104,500 on the house, or $19,500 more than the house is currently worth, and have a real problem when it comes time to either convert the loan to a more traditional mortgage or to sell the home.

An interest-only mortgage is enticing; the low monthly payments make it possible for people to buy a home who otherwise could not afford one, and it allows people to buy bigger and better homes than they could with a conventional mortgage. But the reality is that with the real estate boom slowing down, the interest-only loan isn't the great opportunity is seems to be; it's actually a big, expensive, messy time bomb, waiting to explode.

Aldene Fredenburg is a freelance writer living in southwestern New Hampshire. She has written numerous articles for local and regional newspapers and for a number of Internet websites, including Tips and Topics. She expresses her opinions periodically on her blog, http://beyondagendas.blogspot.com She may be reached at amfredenburg@yahoo.com