Again, this is negative amortization by another name. Essentially, interestonly is more of a feature on a conventional loan product than a loan in its own right. An interest-only feature allows a borrower to pay only the interest on the mortgage in monthly payments for a limited time. Again, it provides a lower payment from the start of the loan, which has made it easier for first-time buyers to afford their initial time in a home. After the end of that term, usually five to seven years, the borrower can refinance, pay the balance in a lump sum, or start paying off the principal, in which case the payments can rise considerably.

Some varieties of interest-only mortgages have been around for years and were used by shrewd borrowers who were sophisticated and disciplined enough to find profitable uses for money saved on monthly payments. The trouble with interest-only loans, much like these other options, is that they've been marketed to everyday homebuyers and in many cases to subprime borrowers who wouldn't have qualified for a conventional loan. In the late 1990s and early 2000s, home prices could support these risky mortgages. But since then, the rise in home prices has slowed.

Interest-only loans were introduced in 2001. By 2004, they accounted for one-third of all new mortgages. The attraction? The low initial payments could qualify a borrower to buy 25 to 30 percent more house. But in a slow or flat market with little projection for real wage growth, this is a very risky proposition. For homeowners who keep such a mortgage until the interest-only time runs out, the big risk is what could happen to their monthly payment.