If you're new to buying a home, you will find that there are as many ways to pay for a home as there are homes available to buy. This confusing maze of financial terms can cause even the more educated of individuals to become frustrated at the process. In the case of the newer interest only mortgages, you need to be certain that you know what you are signing up front before you actually put your name on the final papers. Though the loan agreement sounds good on paper, what will it mean for your life?

When you sign up for an interest only mortgage, you are agreeing to pay only interest in the beginning instead of paying toward the principle of the home you are purchasing. This will typically only last for a certain time period of five to ten years. For the bank, this works well because they will have their part of the loan first. But for the borrower, they are not paying down the actual cost of the home, which means that the loan balance is not changing, even as they make their monthly payments.

But this option of an interest only mortgage does work for some homeowners. Those that have incomes that fluctuate will like the convenience of the lower payments of the mortgage, allowing them to eventually be able to pay more toward the home as their financial situation stabilizes. Borrowers also have the option of paying toward the principle if they come upon more money in their lives. But when you're not paying off the principle at the same time, you might not be the best candidate for this kind of loan as you will only be stalling the inevitable.

Those that want to buy a bigger house, but can not afford it at the current time, the interest only loan will be more useful. You can purchase a more expensive house assuming that you will be making more money by the time the interest only period is over. Of course, if you're not making more money at that point, it may become a problematic situation.

Those that want to invest the money they are saving on their initial house payments might be able to make more money to put toward their house if they are disciplined. If you will honestly invest the excess money you have and are making enough return to put more money toward your home, then this is a good situation.

Those that want to flip houses quickly might also want to turn to an interest only mortgage to help facilitate this situation. By not having to invest a lot of your money initially, you will be able to quickly sell homes for a profit and pay off your payment terms.

There are other reasons why you might want to consider an interest only mortgage - to help with financing a second home, to free up money for other projects, and to help someone else with their home purchase.

But there are many hazards that can come along with an interest only mortgage.

Just as with a traditional mortgage, you will still need to be careful about the interest rate that you are paying. Often, lenders who offer this option will make the interest rate look as though it is lower, and thus it would be advantageous for you to take on this kind of loan. But in reality, the interest rates are often the same, if not higher. So, be sure to look over the fine print of your agreement.

Interest only mortgages are certainly a good way to free up money for other ventures, but you still need to use that money for those ventures -and not just for other material purchases. You will need to start paying that principle quickly enough.