There has been a lot of press on these new fangled interesti only loans lately, but what are they, really? Well, first off, they're not all that new. Second off, they're not technically a mortgagei type, but rather an option or add on to a mortgage.

Let me back up and explain. These interest only mortgages that everyone is so excited about aren't that much different from a regular mortgage. The monthly payments, however, are based on the interest owed for that month, rather than on a full amortizationi schedulei. Let's say you're looking a purchasing a $100,000 house at 6.25% interest with a term of 30 years. Your normal payment would be around $615 whereas if you had the interest only option your payment would only be around $520.

Now, you're probably thinking, "That'll save me nearly a hundred dollars a month!!!" Well, that's true... in the short term. The trouble is, that the interest only option only lasts for a certain number of years, usually 5 or 10. At the end of that period you still owe just a much as you did in the beginning. Looking at our example again, let's say you paid just the interest on that loan for 10 years. At the end of the 10th year, you've paid in about $62,500 to your lender and your balance is still $100,000! Whereas had you paid the regular monthly paymenti your pay off amount would be around $84,000. That's a $16,000 difference.

"But I've saved more than that over the ten years of lower payments, haven't I?"

Sadly, no. By paying the lower payment for ten years you kept around $11,400 in your pocket. Oh, and you're going to need that money now, too. Because now that the interest only option has ran out your $100,000 loan has to be amortized over the remaining 20 year period so now your payments are now going to jump up to around $730 a month so that the loan is paid off on time.

Don't write off the interest only option totally, however. There are plenty of times in life when, as long as you understand the risks, they can be useful.

For example, let's say you just graduated with a nice degree from an institution of higher learning and you're looking for that perfect house to settle down in. You've got the high paying job... along with a mailbox full of student loan payments. The interest only option would allow you to get the house your wanting now and give you several years to get other debts paid down.

Or, suppose you are a seasoned investor. The $11,400 you'll save in monthly payments over ten years could be invested and go on to earn much more than the $16,000 difference in principali balancei. If you know how to invest.

These types of scenarios are what lenders had in mind when the interest only product was created, in my opinion. However, because of rising housing costs loan officers are pitching this option as a way to get people into a house that they couldn't otherwise afford. If that's where you're at, realize that it's only a temporary fix and make sure you understand the risks involved. Ten years out you may lose everything when your payment jumps by 25% or more if you're not prepared.