| IO is at best a questionably useful tool that is misused by most.
Many are using it to buy houses in over inflated markets that are priced out of the reach of a traditional loan. So what happens if the mkt drops? Now you have a loan for more than the house is worth and you have no equity. you've lost money at best. some i'm sure will go bankrupt.
will those who took traditional loans in the same markets be hurting? as LisaB4657 mentioned, in the short run there isn't a big difference in payments. so yeah, the moral of the story is if you intend to buy real estate in a market that is grossly inflated you better get a heck of a deal or hope the bubble burts later and not sooner. ** or not buy in an inflated market ** Those with traditional loans will be in a better place over time (perhaps) because they will be "saving $$" in equity. Those with IO's are depending solely on the house appreciating for any gain. This is called speculating. Not necessarily wrong, but its risky.
Others are using it to get more house for their $$. Well not really. Again, you are getting a bigger house but now you need to furnish it an heat it and maintain it. The "extra" money you "save" by not paying principal is now going to where? the house. or toward that lovely credit card bill that comes cause you charged the extra furnishings you needed.
a house is usually a lousy investment. unless you buy at a great price or your market really takes off or you can get passive income from the home (rent out a loft, income from land, etc) most of the time your return on dollar is sad by the time you figure in utilities, insurance, upkeep, etc. but you do have to live somewhere, and some money put into equity is better than nothing, right? some say maybe.
lets say you do things really well. you buy a solid house at a price that is close to or hopefully less than "true value"... a price that'll stand up over time to reasonable downturns and market swings. you buy a house that you could afford anyway with a traditional loan and you live there more than a few years. now you have some "extra cash" that isn't going toward equity.
well, i guess the best case scenario is that you use that "extra" money to make more money. using it to reduce high interest debt and using it to fund investments that would gain more over time than your money sitting there in equity. if that extra money lets you max out your 401k to get the full employer match, it might make sense. if you are able to channel that cash into passive income investments, it might make sense. this takes more discipline than most people have, and it requires everything to go "well".
if all you do with that "extra money" is spend it on stuff, you're just hoping that the house appreciates and "renting" in the meantime.
i might grumble about having my $$ tied up in equity as being a lousy investment dollar for return, but it beats my human nature to spend cash in hand. ten becomes twenty becomes a hundred becomes thousands, all while you are just paying bills. yeah, inflation eats at the value of that money each year, but i can live with that for now.
ALL real estate purchases have risk. The IO's simply place even more risk in your hands. Those who are financially disciplined and real estate savvy might be able to make IO's work. But i'd bet they'd find other avenues to make and save money. | 
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