Example. We did a deal where the buyer paid I/O first two years. He needed the lowest possible payment to conserve resources--he had a huge cost installing sewer lines to the property before he could open for business. At the end of two he began a fully amortized five-year loan so his payments jumped and the seller finally started getting interest, but at that point business was humming along and everybody was happy.

   Interest-only loans make sense in some cases (see Candice A. Donofrio example).

     The NINJA loans, and forcing banks to loan money to un-qualified borrowers to achieve "equality", contributed to the Crash and the short sale fiasco.

As long as one pays the interest only, there won't be a problem.

As you mentioned, it's the ones who were not qualified/verified who couldn't even make interest only payments. The problem ran a lot deeper than the interest only loans.

For investment properties, especially flips they do.

interest only loans with adjustable rates were a killer to a large percentage of those who tanked.... when the adjustment period came quickly, they couldn't pay!!! and there were tons of them....huge numbers of homeowners who NEVER SHOULD HAVE BEEN SOLD A HOME OR GRANTED A LOAN....

the no doc programs were not as much of a problem as interest only.... 

The issues were beyond the interest only loans, but does it make sense financially? Perhaps for some

Jeff,

I remember those days, the verification was the mirror test.  LOL A

My husband and I did stated income, no verification loans for years and never were late or defaulted. I know many people who were like us in this regard. It's not the loan product that's a problem, it's the loan qualification process. There certainly could be scenarios where an interest only loan makes sense... let's say someone know they'll only own the house for two years. In two years you don't pay off a ton of principal in any event, but the buyer might well be saving a lot monthly on rent with a mortgage.

Make sense ? It depends.  On the borrower and on the lender. 

My #1 pick for the loan program that made NO SENSE was the “Pick a Payment Loan”. The borrow was qualified (a dubious description of many borrowers in those days) and was give a loan in which there was a monthly option to make an interest only payment or a stated payment that did not even cover interest. The shortfall in monthly interest was added to the principal.

Needless to say, many (most?) of those loans ended up badly.

Interest only loans can make sense in special situations.

Absolutely they make sense for well informed people who have the means to pay the fully amortized payment and can qualify for that payment, as well as have sufficient assets.  They do NOT make sense for people who could not otherwise qualify. 

Interest only loans can certainly meet some specific needs. 

My daughter got burned with this type of loan...

Under certain circumstances, it may make sense for some. 

Our area did not experience the problems that the rest of the nation did because we were experiencing an oil boom at that time, I have no idea/experience in this area Jeff Pearl .

They are not great loans, but payments need to be made.  but many of the other loans you speak of caused many a  problem

Michael Jacobs nailed this one!

Interest only and "pick a payment" loans were a disaster for the unqualified and an opportunity for the savvy.

What caused the GREAT RESCISSION was Bank of America's ability to get Moody to rate junk as AAA. The ability to shovel junk onto the taxpayer is essence created FAKE money. The banks KNEW they would not be held accountable. The had a bullet proof exit strategy. And no one went to jail.

All the other stuff, like 'interst only' is just the packaging for a toxic product. Remember, it did not matter the qualifications of the buyer, the bank KNEW they could hand it to Fredde or Fannie as a Moody's rated AAA investment. BofA and Moody's is the cause.

PS: it should be noted that the inception of interest only loans was intended for BUILDERS.  The purpose was eventually misapplied for residential purchases. And apparently still consider a viable option.

They have only proven to hurt the buyer in the long run. I do like the NIV for self employeed as they are left out without any mortgages for such business people. 

It could be OK if the appreciation was at least 6% per year but I prefer not to gamble.

they do make sense....buy only if they are carefully selected by both bank and borrower .... 

Sometimes.

Interest only... sounds like a HELOC.  Those make sense to me.

Jeff Pearl - everyone has a different situation. So in some cases, it may make sense!

They keep payments low but at a cost...

We have an Option ARM on one of our properties and we've always paid additional toward principal reduction. It's worked out well for us. Unfortunately, lots of folks take the minimum payment neg am route, which is a disaster. 

There were many contributing factors to the debacle and greed was one of the main ones.

I sold a home a couple years ago where the homeowners got into an interest only loan, and that was the only way they could afford that giant house.   AND, the very reason they had to sell it when the rate was going to increase.

Both make money for lenders.

I got a stated income loan.  Haven't missed a single payment or been late once.

Several examples already given here for Interest Only Loans they do have a place and sometimes are great to make a deal happen that wouldn't without them. Jeff Pearl 

Having been front and center during the short sale crisis, I think these loans should be avoided at all cost.  If you can only afford the interest on the loan, you can't afford the home.  

Sure, stated income loans were part of the problem, but trying to shoehorn affordability with interest only products sets the stage for fiasco.

Jeff Pearl When I first got into real estate, there were a lot of interest only seconds. Investors were looking for a positive cash flow.

Sometimes they do, for certain types of people and circumstances, I can think of a few reasons.

Stated income loans with no income verification is a totally different thing, with no relation to interest only loans. 

We used to have interest only loans in the past - and they worked for some and in a growing market. The melt down happened due to no doc loans and encouragement from the federal government that everyone should own a home and people granted loans who could not afford them.

I don't think it's a bad option & works in some cases like Candice said. Of course, someone is going to abuse everything.

In some cases, Yes.  Rarely for the conventional residential real estate transaction.

Not Retiring Debt is dangerous economically