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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. Interest-only loans never get paid off! Mortgage lenders have succeeded in selling these mortgage instruments to home buyers by using the skyrocketing real estate prices as justification. 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.