Fixed-rate interest-only mortgages allow borrowers to lock in an interest rate for the life of the loan, while reducing their monthly outlays by paying interest and no principal, typically for the first 10 or 15 years. These loans, which barely existed two years ago, now account for roughly 8% of all new residential mortgages taken out, says UBS AG, a financial services firm. Borrowers took out roughly $39 billion of these mortgages last year, up from just $7.9 billion in 2004, according to UBS, which analyzed loans that are packaged into mortgage-backed securities.

But these mortgages have significant drawbacks. Borrowers who make interest-only payments on a regular basis don’t build up any equity in their homes, apart from any increase resulting from rising property values. And homeowners can be hit with sharply higher monthly payments once the interest-only period ends and the borrower is then obliged to repay the balance of the mortgage over the rest of the loan’s term. Payments in the loan’s later years include both interest and principal.

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