• Interest-only mortgages can allow you to borrow a larger amount.mortgage image by hans slegers from Fotolia.com
  
  Interest-only loans require the borrower to only pay the interest in the initial stages of the loan, rather than having to pay both interest and principal. Interest-only loans are common with mortgages because they allow borrowers to make smaller mortgage payments which means the borrower can afford to borrow more money. However, borrowers must be aware of several dangers of these loans.
  
  

No Equity Built

• When you take out an interest-only loan, your monthly payment is smaller because you are only paying the interest on the loan rather than paying down the amount you owe. No matter how long the interest-only period of your loan, you will still owe the same amount at the end as you did when you took out the loan because you do not pay down the balance of your loan.
  
  

Changes in Payments

• Most interest-only loans are adjustable-rate loans, meaning that your interest rate can change over the life of the loan. This means that your monthly payments can change suddenly and drastically. For example, if interest rate rates rise sharply, so will your monthly payment. If you cannot make the higher monthly payment, you may lose your home to foreclosure. Also, some interest-only loans convert to an amortizing loan after an introductory period, which will result in an increase in your monthly payment because you will have to start paying down the loan in addition to just the interest.
  
  

Balloon Payments

• Some interest-only loans require that you pay off the entire amount of the interest-only loan in one payment at the end of the interest-only period, while others give the option of beginning to make interest and principal payments on the loan later in the term. Many borrowers make the balloon payment by refinancing their loan with another interest-only loan, according to Bankrate. However, if the value of your collateral has fallen, or your credit score has dropped, you may have a hard time getting your loan refinanced. You may have to sell your home if you cannot get the loan refinanced. Worse, if your home value has fallen, you may still owe money even after you sell your home.