Interest Only

This is interesting:

COMPARING MORTGAGES

Interest-only loans are growing more popular as strapped buyers stretch to get into the property market. Initially, an interest-only loan can carry lower monthly payments than a fixed loan because they are usually adjustable loans that require no principal payments. However, payments can leap in later years when principal payments come due and if interest rates rise..

$2,917

Monthly payment for home buyer who borrows $500,000 using a 30-year fixed mortgage at 5.75 percent..

$2,083

Monthly payment if that same borrower opted for an interest-only mortgage in which the rate was fixed at 5 percent for the first five years..

$2,922

If the interest rate did not budge after the first five years, the monthly payment would rise as the borrower began to pay down the principal..

$3,533

Monthly payment after five years if rates were to increase to 7 percent. The payment would jump 70 percent above the original interest-only payment and 21 percent above the 30-year fixed rate mortgage.

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This family is paying $4,200 for an interest only loan.  I'm paying exactly half that mortgage for my Bay Area home and it's a 30 year fixed.  He put down 10%, the same as I, but he wasn't working when he qualified.  Oh my.

With a down payment of $100,000, Michael Kelly bought a $1 million home in Foster City last year despite the fact that he was unemployed at the time. Kelly, 42, landed an interest-only loan using stated income only; that is, he was not required to submit written proof of income. His new technology consultancy is flying, and Kelly is confident that with a fixed monthly payment of $4,200 for the first three years, he chose the right mortgage.
...
Like Howard, he acknowledges some of the possible perils of his mortgage. But even in the worst-case scenario, he figures he could refinance or sell the house and move to a less expensive part of the Bay Area.

"For most people," he adds, "I think (interest-only loans) are a terrible idea. If they don't have bright prospects (for income growth), they could be in real trouble."

So he was not working when he bought but he has bright prospects on the future.  I guess we're all above average. 
I wouldn't worry about selling a home in the Bay Area but if his 1 million dollar property drops the anticipated 10-20% of it's value when this bubble pops then he'll at best lose his 100k down payment and at worse be 100k in the hole if he is forced to sell at this low point.  Why would he have to sell soon?  He has three years for interest only payments and then must pay an ARM (rate can go up) and also pay principle.  If his payments are too much, he be forced to sell and if the market drops, probably at a loss. if he tries to wait it out and goes into credit card debt, he'll be forced to pay his debt thanks to the new bankruptcy law. 

Let's think some positive thoughts.  He can deduct his interest - $4,200 x 12 or $46,200 from his taxes.  If he's in a 33% tax bracket, that's equal to $15,400 in tax refunds.  Here's something else to offset his high mortgage costs.  Let's say he's in a good location - Foster City is very central so he minimizes driving.  It costs $0.36/mile to operate a car.  A 50 mile commute is a 100 mile round trip a day or $36.00.  Driving 20 times a month is $720.00 or $8,640.  Now it may make sense to roll up operating costs of a car into a mortgage if you don't have to drive much.  A rough estimate is every 100k costs $600.00 to finance so a buyer who lives near work can afford a larger payment - $100,000 or more.  His total cost avoidance for a car and taxes is $24,040.