SDR,
It is interesting you bring this up. I did an interest only loan myself and I am in the biz. It allows homeowners to buy more house and it frees up cash flow on a monthly basis. It is a great product for people who want the nice house and still be able to afford the Lexus and tennis lessons.
Practically speaking, it makes the most sense for people in areas that have high appreciation percentages. Plus, you always have the option of applying money towards principal as money permits. Lenders now have a 30 year fixed rate with an interst only option for 15 years.
If you do decide to apply principal and interest you should know that for the first few years of the loan it is mainly interest anyway.
Here is a good example. Lets say you buy a house for $200,000. If you do a principal and interest loan and pay down the mortgage over 5 years by $10,000 and you sell the house in five years for $240,000 how much money did you make? The answer: $40,000! The $10,000 you paid down is your money that you will eventually get back.
Now take the same example above and do an interest only loan. You sell the house in 5 years for $240,000. How much money did you make? The answer: $40,000. BUT, this option saved you money on a monthly basis.
Here is the best part, if an agent is educated about the above mentioned, you will be able to sell more house increasing your commissions. I once did an analysis and figured out that if someone did a fully amortized fixed mortgage versus an interest only 5 year fixed mortgage, that same person was able to afford $70,000 more in house and the payment was the same.
