An interest only mortgage is a type of mortgage that a person pays the interest only for a set period of time, say 3 or 5 years. After that, the person starts paying on the principal plus interest for the rest of the term of the mortgage (ex. 25 years). During those 25 years, the interest rate can be adjusted once each year.

The problem people will face is that after the initial five years of paying the interest only, they will end up with a larger mortgage payment for the next 25 years. If you're not certain that your income and property value will continue to rise, you might find yourself in a lot of financial trouble when you can't afford your mortgage payment any longer. It takes financial discipline to make sure you can afford the mortgage payment after the first five years.

There was a young married couple featured on a television show who bought a $995,000 home with an interest-only mortgage. Their combined annual income was a little less than $100,000. They couldnt afford the home with a traditional 30-year fixed rate mortgage, but they could with the interest-only.

The husband said that they didnt have to worry about being conservative with their money until maybe 15 years from now. But, right now they were going to live it up.

What are they going to do if their income doesnt increase, one of them loses their job, or they end up with too much debt and not enough money at the end of the month to pay it? Unfortunately, this couple and many other people might end up in foreclosure in the next few years because they cant afford their expensive homes.

If you are looking to buy a home to live in for a very long time, then you might be better off with a fixed-rate 15 or 30-year mortgage. If you still want to go the interest-only route, make sure you are disciplined enough in your finances and are certain that your income will rise so that you can afford the larger mortgage payment after the first 3 or 5 years.