For starters, the name is misleading. There is no such thing as an interest only mortgage, because eventually you'll have to pay the loan principal as well. What you're really getting is an interest- only payment scheme, which can be combined with any type of traditional mortgage. The other thing you'll want to keep in mind is that the benefits are way overblown. In the early years of a standard mortgage, the interest takes up about 95 cents of each dollar paid to the lender. The standard payment on a 6%, $100,000 loan is about $600; of that, $500 is interest, "saving" you just $100 per month. Moreover, not paying any principal now means that you'll pay more interest later. Interest-only payments do have a place in the world. In our opinion, at least, there are practical uses for borrowers to utilize a mortgage with interest-only payments -- but none of them involve leveraging themselves into a larger mortgage, particularly one with a variable interest rate.

Interest only mortgage is the hottest items on the real estate market. It's easy to understand why. Only it can lower monthly payments. A traditional mortgage payment is divided between principal and interest. With an interest only mortgage, your payment is lower because you're not paying the principal portion. Say you're considering a $150,000 mortgage. With a traditional mortgage, your payments would be around $1,000 a month. With an interest-only mortgage, your payments would be about $695. So making that same $1,000 a month payment on this type of mortgage lets you get more home for your money. Buying a bigger house is not the only advantage. You may prefer to use the money you save by making an interest-only payment as opposed to a traditional mortgage payment and invest it, or use it to pay debts. 

A worthwhile use for the "spare" cash that an interest only mortgage provides would be to spruce up the home itself. The $100 per month (from our example) would allow the homeowner to invest up to $1,200 per year in improvement projects, which can increase the value of the home. This may not buy a brand-new kitchen, but might be enough for a minor kitchen remodel, a new roof, bathroom upgrade, new energy-efficient windows, or vinyl siding, to name a few. A pool sounds nice, but almost never pays for itself in an improved sales price. Improving the value of the asset may mean a higher selling price later as well as some enjoyment now. Actually interest only mortgage options began to be offered to the masses not as a way to leverage their money, but rather as a way to borrow more money while not increasing the monthly payment.

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