Open House, CNN National

GERRI WILLIS, host: It used to be the 30-year fixed-rate mortgage was the only game in town. Not any more. There are plenty of creative financing options to help you buy your dream home.

One example: the interest-only mortgage. But, as Allan Chernoff show us, it's not for everyone.

ALLAN CHERNOFF reporting: A living room and a wet bar. It's a dream home in Manhattan for Charles Carter and his wife, Carolyn, who lived in a tiny studio for nine years.

But the cost, $460,000, plus another 150-grand in renovations for a three-bedroom apartment, was intimidating. But the Carters took out what their banker described as an interest-only mortgage.

Mr. CHARLES CARTER (Homeowner): And we didn't know much about it, going into the process, actually. And we looked at, and we thought, compared to a conventional loan, that there was certainly more flexibility as well as more buying power.

CHERNOFF: Lenders call them interest-only loans, but that's a misnomer. The borrower is required to make only interest payments in the early years of the mortgage. Later on, though, the borrower still has to pay back the principal. At that point, monthly payments can soar.

Mr. ALLEN FISHBEIN (Consumer Federation of America): Many first-time homebuyers are unaware of the risks involved, and the fact that payments could increase by 30 percent or more after the initial interest-only period has expired.

CHERNOFF: The Carters didn't want to increase their risk, only reduce it. So they're making optional payments on the principal of the loan every month.

Mr. CARTER: But we know that we have the flexibility on, let's say, any given month or any given year, for us to stop paying, you know, principal, if we wanted to.

CHERNOFF: By making those payments, the Carters are building ownership in their new home. Homebuyers who pay only interest to the bank are essentially renting from their lender.

So-called interest-only loans can be helpful for people who can't predict their incomes, says mortgage broker Bob Moulton.

Mr. BOB MOULTON (Americana Mortgage Group): An interest- only mortgage is good for someone who receives a bonus at the end of the year, or who is commission-driven and comes into uneven cash flows. An interest-only mortgage will lower your payment approximately 25 percent, versus a fixed-rate mortgage.

CHERNOFF: The Carters will have to remain disciplined, paying down principal to take full advantage of their loan. But for most people who want to build equity in their homes, so-called interest-only mortgages can be a risky proposition.

Allan Chernoff, CNN, New York.