It is important to realize that there is no reason to fear interest only mortgages.  In fact, interest-only mortgages can work to a buyer's advantage.  An interest-only loan is one that gives the individual the option of paying just the interest or the interest and as much principal as they choose in any given month during an initial period of loan time.

This does not mean the borrower pays only an interest payment for the life of the loan. It only gives the borrower the option to make low payments during the initial few years. Contrary to popular misconception this does not increase the loan balance. The most appealing feature of an interest-only loan is that the individual gets to control his or her payment amount and cash flow for any given month during the interest-only period. An interest only loan does not always offer interest rates that are lower than traditional fixed interest rate loans, however it provides lower monthly mortgage payments.  

There are a number of reasons to consider an interest only loan. The main one is that it makes good financial sense. On a traditional 30-year fixed rate mortgage, almost 70 per cent of the payment goes toward interest in the first six or seven years. On an interest only loan, you could initially pay small amounts and invest any extra money that you have. This could bring in higher rates of return.

A common myth with interest only loans is that the individual does not build equity. This is not necessarily true. As homes have been appreciating between 5 to 6 per cent a year, chances are that even if an individual does not pay the principal for the first few years, equity is being built.

 While an interest-only loan may be an appealing option to many, there are some drawbacks to it. Interest only mortgages are short-term solutions for your financial needs A big problem with interest only loans is that the investment funds that you have may not be enough to pay back the capital at the end of the mortgage term. If you cannot pay back the capital then you could end up losing your home. This is worse if you are nearing retirement.

If you are going to take out an interest only mortgage, make sure that the investments for the payback funds have been invested wisely. Also, make sure that you have a contingency plan in place if your original investments do not work out. However, if you do not feel that you are game for this than maybe the more traditional flat rate investments are what you are looking for.