One of the most common myths is that if a borrower makes a mortgage payment larger than the interest-only payment, the IO will amortize faster than "other mortgages." You do get this result if you compare the amortization on an interest-only ARM with that on a fixed-rate mortgage carrying a higher rate, and you assume that the ARM rate doesn't change during the period you are looking at. But borrowers are led to believe that this comparison is between IO and non-IO, when in fact it is between an adjustable and a fixed-rate mortgage.

On any given type of loan, whether fixed or adjustable, the same payment will amortize the interest-only version and the otherwise identical non-IO version in exactly the same way. But if the rate on the interest-only version is higher, which is almost always the case, it will amortize less rapidly than the non-IO version. If you pay extra on any mortgage, you'll pay it down faster. But if you have a mortgage with an interest-only option and you make the same payments as you would on a standard amortizing mortgage, it will pay down at the same rate as the amortizing loan.

Let's take an example: Person A has an interest-only loan and Person B has a fully amortizing loan. Both loans have the same interest rate. If both people make the same monthly payment, then the loans become identical because they will both pay down at the same rate. The only difference between the two is that Person A has the choice to pay less if he wants to in any given month. Person B doesn't have that choice. Interest-only loans allow people to pay only the interest or interest plus as much principal as they wish; even extra if they want. But the reason people get interest-only loans is to have the payment flexibility when they need it. Instead of paying principal on your loan, you may want to use it for other things such as saving for your child's college tuition or investing in other things that bring a higher rate of return. Another good way to funnel your money is to pay off high-interest credit card debt.