Want an Interest-Only Loan? No Problem

Borrowers of such option ARMs are not restricted from making payments higher than the minimum. Sometimes the lenders specify four different payment choices corresponding to the fully amortized 30-year rate at the top with lesser levels down to the minimum. But many debtors choose these loans solely because they couldn't afford anything more and so seem doomed to watch their debt grow as they struggle to make even the minimum payments.

In addition to negative amortization mortgages, the interest-only ARM is another unconventional mortgage offer still available that is best avoided by average home buyers.

Although interest-only loans don't generally result in an increasing loan balance, mortgage payments still can jump radically when the lower teaser-rate period ends. And in that way, such loans are as risky as option ARMs because home owners can find themselves unable to cover the higher expense.

Officials at the Center for Responsible Lending also add that such loans are particularly problematic when offered in the subprime area, as interest can skyrocket at reset periods even more than with prime loans. They also caution taking on loans in which lenders have grab bags of features.

Countrywide and Bank of America both offer I/O ARMs, as do GMACs Ditech unit, Citizen's Bank and First Horizon, among many others.

In the next part of the series, we'll explore how such loan products came to be introduced, for whom they were originally intended, and what went wrong.