During the interest-only years of the mortgage, the loan balance will not decrease unless the borrower makes additional payments towards principal.
[2] Because a homeowner does not build any equity in an interest-only loan he may be adversely affected by prevailing market conditions at the time the borrower is ready to either sell the house or refinance.
Due to the speculative aspects of relying on home appreciation which may or may not happen, many financial experts such as Suze Orman advise against interest-only loans for which a borrower would not otherwise qualify.
A study published by the Federal Reserve Bank of Chicago before the 2008 financial crash claimed that most Americans could benefit from funding tax-deferred accounts rather than paying down mortgage balances.
This mis-selling, combined with the poor stock market performance of the late 1990s, has resulted in endowment mortgages becoming unpopular.
These loans are given provided that the borrower hands over a security (like gold ornaments) or the documents of the same (house papers) to the bank.
Buyers will buy a private house while it is still under construction, and pay only the interest of the mortgage until the property is completed.
However, interest-only loans contributed greatly to creating the subsequent housing bubble situation, because variable-rate borrowers could not afford the fully indexed rate.