Pros and Cons of an Interest-Only Mortgage (Smart Choice)

Why would one consider a "Smart Choice" (interest only) mortgage loan?  Why not rent and save the funds?  Here are a few of the facts, and additional resources to consider.

More often than not, these types of loans are entered into with the intention of saving the amount that would have gone to principal, but it usually doesn't happen, for one reason or another.  The "interest only" period is usually set for a specific amount of time; generally 5 years, but can be 10 years.  If you elect to use the option of "interest only" payments, you should understand that your note balance at the end of the term will be the same as the day you closed on your home.  Granted, you may have a Deed of Trust, or similar document on file with the courthouse, but if the market value in the area you purchased your home has declined, you are left in a black hole.

A similar sort of program was initiated years ago, for the purchase of autos.  It is called "Smart Buy", pretty much meaning more 'bang for the buck.'  It allows those with limited income and/or bad credit to purchase a newer year vehicle and make low monthly payments, which is attractive to these individuals.  They pay no heed to the consequences of the contract, which requires a balloon payment at the end of the loan term.  Many times it is in the area of $9,000 or more.

Both the "Smart Choice" mortgage, and "Smart Buy" auto loan potentially deny the buyer any equity, whether for 5-10 years, or at all.  So why not just rent or lease, if that is the case?  I know two situations in which it may be feasible to enter into an "Interest Only" mortgage:

1)  The home being purchased is well below market value, and due to the inflated real estate prices in the location, there is a potential for considerable equity in 5-10 years, at which time the home can be sold, if desired.