The interest-only loan - a product that used to be the exclusive province of prime borrowers and wealthy homeowners looking to manage their finances - has begun to make inroads in the subprime market, according to a recent report from UBS.

An interest-only loan is not to be confused with the MBS security created by stripping interest payments from a pool of mortgages, as in an IO/PO. Rather, it is a loan that allows the borrower to pay only interest during the first two to five years, after which the loan begins to amortize and the borrower must pay both interest and principal. Some are questioning whether these loans leave subprime investors unduly exposed.

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