An "interest only" mortgage is one in which the monthly payment for the loan does not include the repayment of the principle balance for a specific period of time. Interest only loans are offered on both fixed rate and adjustable mortgages, and also on option ARM loans. Once the interest only period ends, the loan becomes fully amortized, which results in much higher monthly payments. The new payment is much larger than it would have been if the loan were a standard one, and it had been amortizing from the start. The longer the interest only period, the larger the new loan payment will end up being when the period ends.

While you are in your interest only term, you will not be adding anything to the equity in your home, but because the payments will be lower, it may allow you to afford the home that you want rather than having to settle for the home you can afford.

You qualify for an interest only loan based upon the payment you would make during the interest-only period, and it is likely that you'll refinance the loan before the interest-only term expires, so this could be a way to lease a dream home now and invest what you would spend on principle payments elsewhere while at the same time realizing the tax advantages and appreciation that accompany home ownership.

As an example, if borrow $250,000 at 6 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year interest only payment plan, your monthly payment initially would be $1,250. This saves you $249 per month or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income will have jumped accordingly to support the higher payments or you have refinanced your loan by that time.

Mortgages with interest only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.

Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.