With an interest-only mortgage, the payment covers just the interest. You pay the principal later. Since the monthly payment does not include principal, it’s lower than it would be on a conventional loan of the same size. And that’s the appeal – a borrower can save some cash or qualify for a larger loan.

You pay more

But over the long term the interest-only borrower actually pays more. Here’s why:

Standard fixed-rate mortgages are “amortized” over a given number of years so that the monthly payment is always the same.

During the first year, when the outstanding principal is very large, the lion’s share of each month’s payment is for interest. Over the years, principal gets smaller. The interest payment therefore gets smaller, too, and an ever-larger portion of the fixed monthly payment goes to principal. In the final year, with just a small principal remaining, everything’s reversed: Virtually all the payment is for principal.

With an interest-only loan, the principal doesn’t get smaller. So it’s like making the first month’s payment over and over again.

Proof is in the numbers

On a $100,000 loan for 30 years at 6 percent, the monthly payment on a conventional mortgage would be $600 – $500 in interest, $100 in principal. With an interest-only loan, you’d pay just the $500 in interest.

Although this sounds good, the interest-only deal will cost more in the long run. With one type, for example, you pay only interest for the first 15 years, then interest and principal for the next 15. In every month the remaining principal is larger than it would be with a standard loan, so the interest payment is bigger.

Total interest with a $100,000 conventional fixed-rate loan at 6 percent for 30 years would be about $116,000. Pick an interest-only loan with the same rate but no principal payment for 15 years and total interest would come to $142,000.

With the interest-only loan, the borrower pays $100 a month less for the first 15 years. But in the final 15 years, she pays $844 a month due to the large debt remaining.

Why it works for some

Some are drawn by the prospect of qualifying for bigger loans. Some have other uses for that $100 a month. And others – gamblers and folks with sophisticated approaches to finances – see investment opportunities.

Suppose, for example, that you got the interest-only loan and invested the $100 you’d save during each of the first 180 months. At an 8 percent annual return, that would grow to $34,600 in 15 years. With a good enough investment return, this fund could more than offset the high monthly payments in the final 15 years – you’d earn a profit.

A real pro would also consider inflation and other factors, figuring that every dollar saved now might be worth more than two or three inflation-ravaged dollars spent in the distant future.

But unless you know how to do those sophisticated financial calculations, best steer clear of interest-only deals.

For most of us, they’re too hot to handle.