From the New York Times:

According to Loan Performance, a research firm, 26.7 percent of all loans were interest-only last year and another 15.3 percent were payment-option adjustable rate mortgages, which allow homeowners to choose how much they paid each month.

That’s staggering. Almost half of all mortgage loans last year were interest-only or payment-option, and in most cases I’d bet the principal paid down on a payment-option mortgage is minimal or zero.

Payments are lower with the interest-only loan and, presumably, those holding the loans are saving the difference.

Uh huh. If by “saving the difference” the author means “those holding the loans entered into foolish and short-sighted mortgage schemes because they have an insatiable appetite for bigger and bigger McMansions, which they can’t afford to actually buy but can finance in the short term, banking on rapidly increasing home equity to bail their sorry butts out of a jam when it’s time to pay the piper and they have no savings and debt up to their eyeballs.”

And sometimes that works. But more and more frequently it won’t, and the people who are upside down on their mortgages (when the mortgage is for more than the house is actually worth) due to negative amortization loans, inflated appraisals, or sinking real estate values in some areas are going to be in for a world of hurt.