MSN Money recently ran an article stating that interest only loans are bad choices for most borrowers. The headline ran as "Interest-only loans: not magic, usually not smart".

Then, the next line:

The last interest-only mortgage craze ended with a wave of foreclosures in the Great Depression. Today's interest-only ARMs are even riskier. Here's what to ask before you take that risk.

The author does a good job disclosing some of the risks inherent to interest only mortgages, but he avoids putting mortgages in the full context of a complete financial plan.  As a result, the article is filled with fear-mongering instead of an actual education.

For example, the author warns of:

1. Foreclosures resulting from depressed home values
2. Adjustable nature of interest only loans and the dramatically higher payments that can result when the loan begins to amortize and/or adjust.
3. Unscrupulous loan officers that misdirect the customer regarding the benefits of interest only loans      

To address these issues, one-by-one:

1. A property will lose value, regardless of the mortgage product on the property. In fact, a lender will be less likely to foreclose on a property in which equity balances are low because there is a greater loss to the lender. Low equity households are better candidates for forbearance and other payment arrangement plans.
2. This is partly true.  The fixed period of the loan can easily be 3 years, 5 years, 7 years or 10 years, but it can also be fixed over 30 years.  For the ARMs, a homeowner reserves the right to remortgage into a new loan before the products adjusts and/or begins its amortization schedule.
3. Customers can combat predatory lenders by seeking education and studying mortgages. There are many wonderful resources for learning about mortgages on the Internet.

It's only at the end of the article that the author briefly highlights the positives of interest only home loans and he nails it on the head.

In short, it comes down to discipline -- just like with any other mortgage product.

You can't open a newspaper without finding articles that publicly shun interest only mortgages. 

It's like the writers are dogs and the interest only products are the proverbial fire hydrant.

It dumbfounds me.  Interest only loans are not right for everyone, but they are certainly right for someone.  Just because a person opts for an interest only mortgage, that doesn't make them "irresponsible" or careless.  I would argue the contrary. 

Interest only home loans put the home owner in greater control of his mortgage.

See, every dollar that is invested in a home (as equity) can be categorized three ways:

1. Illiquid. You cannot access the funds without incurring fees. You also must wait several days or weeks before the funds are in-hand.
2. Unsafe. The more equity in a property, the more it is likely that a bank will foreclose upon you if you miss 3 consecutive payments. This is because the bank can recoup more of their original investment.
3. Non-Income Generating. Equity does not appreciate year-after-year -- a home does. Every dollar invested in a home is not earning interest if it remained in an interest-bearing account.

When these articles scream: "What will happen when the interest only mortgages begin to adjust!", I want to tell the writer: "Interest Only mortgages aren't always adjustable rate mortgages!".

For the sake of example, let's say that interest only product is an ARM. When the loan adjusts, it will only adjust higher if interest rates are higher. What gets forgotten, though, is that as interest rates increase, so do savings rates.

If you don't believe me, look in your local newspaper for bank advertisements. You'll see them touting their high interest rate CDs and savings accounts.

At INGDirect, the savings accounts are yielding 3.0% APY. Compare that to a 1.3% just 12 months ago. At NetBank, you can lock in a 5-year CD at 4.55% APY.

Interest only loans are not a bad thing. They reduce a homeowner's monthly payment and allow for cash to be invested somewhere "smarter" than equity.  When they are bad is when homeowners use them as affordability products, to help sustain a lifestyle beyond their means.

Interest only mortages are not a good match for every borrower profile, but they are right for a lot of people.  Before you buy into what the journalists say, get a second opinion from a mortgage or financial professional.