Answer: "Interest-Only" loans are also called "interest first" loans. With these loans, buyers are responsible to pay only the interest on the outstanding balance every month. Typically loans amortize over a given period (i.e. 30 years) and each payment represents P&I (principal and interest). Interest-Only loans do not require borrowers to pay principal reduction as part of their payment for the first 5, 10 or 15 years (depending on the program). After that time the payment jumps to P&I on the outstanding balance of the remainder of the term, often at significantly higher payments. Will this work for you? It depends: How long are you planning to stay in the property? How long are you going to make the minimum payment? How will you address the higher payment later on?

Sometimes these programs are exactly the right solution for the buyer, but often they are used to squeeze someone into more home than they can afford without a plan for how to address the payment increases to come. Before moving forward with this type of loan, be sure you understand all the ramifications.