Millions of buyers during the boom leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.
It was a 'buy now, pay later' strategy on a grand scale, meant for a market where home prices went only up, but with many of these homes worth less than the loans against them, many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75%.
Keith Gumbinger, an analyst with HSH Associates, said: 'This is going to be the source of tomorrow’s troubles. The borrowers might have thought these were safe loans, but it turns out they bet the house.'
New York Times