Around 1978 I was victim of something worse than an 'interest only' mortgage. I had a 'Graduated Payment Mortgage' which actually increased the principle of the loan balance over either the first four or first five years. The idea, of course, was to qualify buyers for more house (e.g. larger purchase price/higher mortgage amount) by stepping up the payment over 5 years at which time it would remain stable for the balance of the loan.

My $40,000 loan had a payoff of something in excess of $43,000 a few years into the loan before it began to amortize. In a market where values are increasing and the borrower is able to make the increased payments each year that's probably not a terrible thing. However, in this world of economic cycles, it can be awful for someone who doesn't put a large amount down and then finds themselves needing to sell in a static or declining real estate market.

Simply put, if you can guarantee that the value of the property will increase and guarantee that you'll be able to either liquidate or successfully refinance at a payment you can afford when the balloon comes due an interest only loan might be OK. Absent those guarantees, however, I'd avoid them like the flu.