Most mortgages require that you pay back some principal with each payment -- a little bit at first, a lot more as time passes. Interest-only loans skip that requirement in the early years of the loan so that none of your payment goes toward paying down principal. The result is a significantly smaller initial payment compared with other options, such as a traditional 30-year fixed-rate mortgage where you pay both principle and interest.

Interest-only loans make the most sense when you're borrowing a big chunk of money. At smaller loan amounts, the savings might not offset the loans' greater risk. And interest-only loans arent really meant for the long haul. Lenders say most borrowers who get them expect to either sell their homes or refinance before the interest-only period ends.

Who chooses interest-only loans?
Interest-only borrowers, lenders say, come in two basic types:

The upwardly mobile. These people are stretching to buy more house, since the same payment on an interest-only mortgage will buy about 20% more house. Translated, that means someone who could qualify for a $500,000 house on a traditional 30-year fixed-rate mortgage might be able to land a $600,000 place with an interest-only loan. Many of these folks expect their incomes to rise sharply in a few years, and they want a bigger home now, rather than waiting to trade up.

The cash-flow crowd. Others want the smaller payment, for whatever reason. They could be investing the difference, or they might be business owners or commissioned salespeople with irregular incomes, said Washington Mutual executive Lenny McNeill. These borrowers want a smaller payment for the lean months, while being able to pay down their principal in big chunks when the money comes in.

Interest Only Mortgages are a strategy that works very well while home prices soar, not so well when markets stall or tank. If you have to sell when prices are down and you havent built up sufficient equity, you could take a big loss.

You also could find yourself poorer in the long run if you arent disciplined. Millions of Americans have built up their wealth over the years by paying down their mortgages. If you skip that step by paying only the interest on the loan and not pay down the principle, and happen to spend the extra cash instead, your overall net worth will suffer.

The interest-only solution can work for a while, but eventually most Americans will want to own their own homes -- not just rent them from the bank.