SALEM, Ore. (CNN/Money) – The American spirit of "buy now and pay later" – or never – has been a driving force behind this unprecedented housing market.
Gone are the days of saving a hefty down payment and striving to pay off your house in 30 years. Today, the typical first-time home buyer or vacation-home buyer might finance the entire cost of the house and pay only the interest owed on the loan for the first several years.
The latest option? A monthly "minimum payment" that doesn't even cover the interest.
Such innovations have, no doubt, been a boon to buyers who might have otherwise spent years socking away a down payment or paid a premium for a 30-year fixed-rate loan on a house they planned to own less than five years. And judging by historically low default rates, homeowners have been able to handle their growing debt burdens.
Then again, buyers have been experimenting with more aggressive financing in the best of all times, when interest rates remain low and home prices continue to appreciate.
"Mortgage markets have been so flush with cash that home buyers are able to layer one risk on top of the other," said Keith Gumbinger, vice president of HSH Associates. "It's possible to borrow more than the value of the home, put in no money of your own and pay a minimum monthly payment."
What's the worst that can happen, you ask? Consider the danger with three increasingly popular loan structures.
The 20-percent down payment, once the first hurdle to homeownership, is now the exception rather than the rule. According to a recent survey by the National Association of Realtors, in fact, 25 percent of all buyers financed 100 percent of the purchase price, and 42 percent of first-time home buyers bought with no money down.
Though small down payments are the norm, borrowers with less than 20 percent to put down must either pay private mortgage insurance or borrow their down payment using a home equity loan or line of credit.
Most choose the latter option, also known as a "piggyback" loan. That makes sense if you can afford to make your regular mortgage payment and pay more than the minimum owed on this loan.
The danger: A home equity line of credit, which is the most common such loan, carries a variable rate and has no fixed payment schedule. If you make only the minimum payment, the balance of this loan will remain the same. What's more, the interest you pay is immediately affected when the Federal Reserve raises short-term interest rates.
Interest only loans
As the name suggests, an interest only loan requires that you pay only the interest due on the loan for the first five, 10 or 15 years of the loan. It's a popular option in areas where high home prices have made it tough for buyers to afford monthly payments that include principal and interest.
According to R.J. Arnett, executive vice president of national wholesale lending forMortgageIT, an interest-only loan makes sense for first-time buyers whose incomes will likely go up in the next few years or investors who don't want to commit to paying principal every month -- but could afford to pay the higher amount if needed.
"If you're the gambling sort, you could get into an interest-only product and bet that the market will build equity for you," said Gumbinger, explaining that paying down principal is not as much of a concern for people with shorter time horizons, particularly if home prices are going up.
The danger: Homeowners who are using these loans to buy more house than they can afford could get into serious trouble if they don't budget for higher payments down the road. There's no a guarantee that prices will appreciate. And if you stay in the house longer than you planned, your monthly payment jumps drastically after your interest-only honeymoon period.
The 'minimum payment' option
The mortgage du jour -- which is marketed as a cash flow ARM, option ARM or flex ARM -- gives borrowers three or four payment choices each month.
They can pay the old-fashioned principal and interest of a 30-year loan.
They can pay only the interest due.
Or, they can make a "minimum payment" and add the rest of the interest they owe to the balance of the loan.
Lenders put a limit on how much interest borrowers can pile onto their loan. Still, borrowers who consistently pay the minimum will see the balance of their loan go up rather than down over time.
"Traditional banker that I am I didn't think there would be much interest in this product," said Anthony Hsieh, president of LendingTree.com, referring to the payment option his company rolled out in February. "But consumers have loved it."
Still, Hsieh cautions that this not the best bet for everyone. "If you have seasonal income or are self-employed with monthly income that is inconsistent, this loan may be great for you," he said. "You can pay the minimum monthly payment a few times per year, but catch up by making extra principal reduction in months when your income is higher."
If, however, you're using such a loan to push the limits on how much you can afford, you could be setting yourself up for trouble.
The danger: "Not only do you not own any of your home, but you may be piling up additional debts that could quickly exceed the value of the home," said Gumbinger, adding that the interest rates on these loans adjust every one to three months. "There are no guarantees that rates will remain at comfortable levels and no guarantee that home prices will continue to go up."
"You could find yourself in a rather uncomfortable circumstance," he said.
Click here for more on buying a house with little down.
Click here for more on interest-only loans.