A recent blog pretty soundly condemned interest only loans as a bad deal straight across the board.
However, depending on your client's financial acumen and risk tolerance, an interest only loan might be just what they need to achieve a particular goal at the lowest costs.
I understand if you have an interest only loan and you perhaps live in southern California or south Florida right now and have a house you barely qualified for to start with financed with an interest only ARM and it starts adjusting upward, you might get financially uncomfortable or in serious trouble pretty easily. After all, who really believes a 3-4% interest rate on an ARM is going to last very long.
But if you're a well capitalized, savvy investor and you used an interest only loan to buy a house you're going to fix up and resell within 6 months, it might be a pretty good way to manage your cash flow on the deal.
Interest only loans are not inherently bad but sometimes the people that get talked into getting one because of some "advice" they may have received from Uncle Fred get in over their head and could end up going down with the ship.
My wife and I recently bought a new house. We bought it without selling our former residence.
We were able to do that because we took our equity out of the old house with an interest only loan and paid a huge hunk down on the new home.
I like to think we're fairly savvy about money and mortgages and I know we won't be paying anything toward the principal on our bridge loan. But it allowed us to achieve our goal of buying the new house and avoiding the hassles and aggrevation of trying to market our old house while we were still living there.
Now, thanks to our interest only loan we can fix up the old house at our leisure and let it be shown at a potential buyer's pleasure with no interuption to our lives. When I sell it we'll pay off the interest only loan and go on with life.
Interest only loans are not the right mortgage vehicle for everyone just like a ARM or a 30 year fixed rate loan may not the the right thing for some.
Each individual situation is different and should examined closely to ensure the best advice is given and the best financial solutions are used.