The popularity of interest-only mortgages continues to increase as interest rates rise, but don't jump too quickly into this new mortgage scheme.  Financial services firm UBS AG analyzed loans being packaged into mortgage-backed securities and found that the volume of interest-only loans jumped from only $7.9 billion in 2004 to $38 billion last year. They now account for 8% of all new residential mortgages.

While the interest-only mortgage does look attractive because of the initial lower payments, your payments will jump dramatically when the interest-only period ends in 10 to 15 years. For example, a standard $300,000 30-year fixed rate loan at an interest of 6.62% (this week's average) would have a principal and interest payment of $1,920.  The interest-only loan rate is a bit higher at 6.75%, but the payment is much lower at $1,687.  That's because you won't be paying anything toward the principal of the loan initially.

Those lower payments may sound great if you're trying to buy a larger home, but don't get caught up in the hype of the interest-only loan.  Usually the interest-only period lasts for just 10 years.  If you don't sell or refinance before that time, your payments could jump by 35% to $2,281, when the interest-only period ends.  You will still have to pay the principal off in 30 years, but only have 20 years in which to do it.

If you do need to sell the home in the first ten years,  you'd better hope your home has appreciated enough to cover the costs of the sale, since you haven't paid down any of the principal of the loan.  If not, you may have to come up with cash to close the loan in order to pay closing and sales (real estate commissions) costs.