Interest-only mortgages are considered higher risk compared to traditional mortgages because the borrower' s scheduled payments only cover the interest on the loan, and none of the principal balance is reduced during the interest-only period. As a result, the loan balance remains unchanged, which increases the risk for both the borrower and lender if the value of the home decreases or if the borrower cannot make larger payments when the principal becomes due.
* Other risks, such as exceeding the APOR (Average Prime Offer Rate) by a certain margin (C, D), apply to high-cost mortgages, not specifically interest-only loans.
References:
* CFPB Qualified Mortgage and Ability-to-Repay Rule
* Fannie Mae Guidelines on interest-only mortgages