NEW YORK (CNN/Money) - Want to buy a home, but can't afford the price tag?

If you're in that boat, like so many other homebuyers these days, you may find your mortgage broker or banker suggesting an interest-only mortgage. Like it sounds, an interest-only mortgage gives you the option of just paying interest, instead of both interest and principal.

While it may seem like a good way to stretch your mortgage dollar, there are few things you'll want to know before you sign on. Here are today's 5 Tips.

Mortgages with interest-only features have been around for a long time. But far from catering to a mainstream crowd, they were originally designed for affluent and investment savvy borrowers.

For example, a salesman who might depend on his annual bonus for a large proportion of his income, might opt for an interest-only mortgage so that he didn't have to rely only on his relatively small regular paycheck to foot his housing costs.

These days, though, interest-only mortgages are increasingly offered to homeowners trying to stretch their budgets to afford a home. Interest-only mortgages allow cash-strapped shoppers to borrow more money, make lower monthly payments (at least at first) and get a whole lot more house to boot.

A typical interest-only loan would include an adjustable rate feature as well, so not only does the borrower have flexibility in paying principal but they also have a rate lock for say, 5 or 10 years.

The attractions of these hybrids are particularly clear when compared to a plain vanilla product, like the 30-year fixed rate loan. For example, a first time homebuyer with good credit would pay $1,886 a month for a 30-year, $300,000 fixed-rate mortgage at 6.45 percent.

CNNfn's Gerri Willis shares tips on getting the most from an interest-only mortgage. Play video (Real or Windows Media)

But according to Jason Jepson of HomeLoanCenter.com, with an interest-only option, the monthly payment on that $300,000 mortgage would be just $1,125 (assuming an ARM fixed at 4.5 percent for the first 5 years). The savings is substantial, at $761 monthly.

The tax benefits are also enticing. According to Bob Moulton of Americana Mortgage Group, as with any mortgage, the interest you pay is tax deductible. So if you're paying 100 percent interest, your payments are 100 percent tax deductible.

Just because principal payments don't have to be made during the initial term of the loan, that doesn't mean they are forgiven. You still owe all of the money you borrowed, plus interest at the end of the initial fixed rate period.

But instead of being able to pay it off in 30 years, you now face repaying that amount in just 25 years. That means your mortgage will jump -- dramatically.

Current Mortgage Rates   Type Overnight avgs 30 yr fixed mtg 5.29% 15 yr fixed mtg 4.84% 30 yr fixed jumbo mtg 6.33% 5/1 ARM 4.65% 5/1 jumbo ARM 5.13% Find personalized rates:

For example, the five-year interest-only mortgage holder who borrowed $120,000 at 6 percent interest, still owes that amount at the end of the interest-only period, but has just 25 years to pay it off. So instead of owing $600 a month as they did under the initial terms of the loan, the mortgage jumps to $773, a 29 percent increase.

Keith Gumbinger, whose Web site, www.hsh.com, tracks mortgage rates, says this term compression is one of the unexpected costs some interest-only mortgage holders find themselves up against. What's more, he says, in the example above the interest only mortgage holder ultimately pays more in interest -- some $8,000 more.

For many new homebuyers, home appreciation is a foregone conclusion. Home prices have been soaring over the past few years, but they've got to come down sometime. Jepson expects to see home prices softening in some areas over the next 12 to 14 months.

Because interest-only mortgages delay the build-up of equity in your home, falling home prices could spell disaster. If your home's value falls at the time you need to sell, you could be "under water" and on the hook for more money than your home is currently worth with steep payments piling up.

Jepson says this kind of loan is a gamble. Any time you bet on which way the market is going to go, you're taking a risk.

Another key risk is that interest rates on your ARM will rise. With Greenspan & Co. likely to continue raising rates this fall, expectations are for mortgage rates to climb. If rates are 8 percent after your first 5 years are up, the payment on your $300,000 mortgage could balloon to $2,245!

Moulton says people who take the plunge on an interest-only mortgage always plan to save the savings. But, he says people don't necessarily do what they say they're going to do.

Sometimes, people aren't as disciplined as they should be. And even the best financial plans change. Financial needs change, jobs change, marital and family plans change.

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Eric Tyson, author of "Investing for Dummies," says all too often the people making use of these mortgages are people who really need to be wise with their savings. It's essential for them to keep their financial goals and future mortgage payments in mind.

Years down the road, when their payments jump an emergency reserve could make all the difference. Rather than choosing a CD (certificate of deposit) Tyson recommends money market funds. He says a good money market fund will offer yields similar to a short-term CD with more flexibility.

He also suggests channeling more of your money into a 401k in order to reap some tax benefits. If you don't have a 401k or you've exhausted yours, you could also look into an IRA, which is tax deductible if you meet certain criteria. (For 2004, singles with adjusted gross income of $45,000 or less and married couples filing jointly is $65,000.) Another alternative is to look into a Roth IRA -- there's no upfront tax break, but when you're retirement age, you pay no tax on it.

If you're looking to put it in a mutual fund, choose funds that match your tax situation. If you're a high tax bracket investor and you choose a taxable bond fund, you may end up paying a fair amount of returns in taxes.

If you're investing with a 5-year timeline (to match the term of your interest-only ARM), you might look for a high-quality corporate bond fund. Tyson recommends Vanguard Short-Term Corporate (VFSTX: Research, Estimates).

As rates rise, the average homebuyer who can afford a $300,000 home with a 6 percent fixed rate mortgage can only buy a $225,000 house if rates jump to 7 percent.

Instead of stretching for an interest-only mortgage, Jepson says it may make more sense to downsize your dream. He says the smart approach may be to take a step back and look at what you can afford.

Consider your job, the economy and the outlook for future. A smart bet is to get into a home you know you can stay in, one that won't be a strain on you or your family. Building equity in a home you can afford now is a wise way to get into the real estate market. You can always improve your home using a home equity loan or line of credit later.

Just make sure when you do shop around to watch out for "teaser" rates and offers that sound too good to be true. There are offers for extremely low rates on the Internet; they often include gifts like a $250 credit at Home Depot and even airline miles. But these "teaser" rates usually jump after a period of three months. Don't get sucked in. And don't get greedy, only sign on for the loan you need and the loan you can afford.

Gerri Willis is a personal finance editor for CNN Business News. Willis also is co-host of CNNfn's The FlipSide, weekdays from 11 a.m. to 12:30 p.m. (ET). E-mail comments to 5tips@cnnfn.com.