The Advantages and Disadvantages of Interest-Only Mortgage Loans :

   Before delving into an interest-only mortgage loan, it will be well to consider the advantages and disadvantages of such a plan.

The Advantages

Interest-only mortgage loans are beneficial in some scenarios, such as when a buyer does not expect to keep the house for a long period of time. This would be the case when a buyer, anticipating a rise in real estate prices, is looking to sell the house within the next few years. With an interest-only mortgage loan, this prospective buyer will not find it necessary to use up a large amount of money. Thus, the house can be acquired with a minimum outlay of cash.

The Disadvantages

  An interest-only mortgage loan is a great idea if: First, real estate prices are going up; and second, if interest rates remain low.
If a real estate "bubble" is in progress, then people looking to make a profit in that business can utilize interest-only mortgage loans to fund their acquisitions. By leveraging their finances, speculators can make big profits out of the property they acquire. The only problem is, all bubbles must burst, and sooner or later real estate values have to go down. In this scenario, those who acquired properties using interest-only mortgage loans may be saddled with long-term financial obligations that will be difficult to get rid of. 
A further danger arises when interest rates rise. If interest rates go up, so would the required monthly payments. If it rises one or two percentage points, it could mean real trouble. Because of this, interest-only loans must be used only after calculating the risks involved.

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