Before you consider taking out an interest-only mortgage or loan, you should first understand what they are. Unlike traditional, fixed-rate mortgages or loans, interest-only mortgages / loans allows the borrower to initially pay the interest on the principal for a short period of time, rather than making payments on both the principal and the interest. This is how it works: say, for example, you've taken out a mortgage for $100,000.00, which would require a monthly payment of around $1,000.00. However, with an interest-only mortgage, the same payment would only amount to around $695.00. You could use the extra money to pay existing debts, like credit cards or student loans, or perhaps invest it.

Instead of paying down that low rate loan, you could take the extra money you'd have each month from making interest-only payments, and invest it in something that would bring you a higher rate of return. Depending on your loan amount, you could have access to thousands of dollars over the course of several years to invest or reduce high interest debt, including credit card debt. An interest-only home loan may also be a good option for people who expect to be in their homes for less than ten years. The average homeowner stays in their home between five and seven years. As mentioned before, home mortgage payments are mostly interest for the first years of the loan. Many homeowners like the option of making interest-only payments and using the extra money as they please - save for college tuition, make home improvements, or buy a much-needed new car.

But if the only way you can actually afford to buy a property is to have it interest-only - over the long term - then it won't be suitable. The only way you're going to be able to repay the mortgage is to sell your property, unless you have a windfall. Anyone who finds interest-only products appealing needs to think long and hard before taking the plunge. While the prospect of paying relatively low amounts each month can seem very enticing, failure to pay close attention to how they plan to pay the cash back means they are effectively placing a time bomb under their finances.