"Does it make sense to use an interest-only loan to buy the home of our dreams? We feel that is the only way we will be able to afford it. We are near retirement age and will have significant equity in the house, but our income isn't large enough to afford more than the interest payment. I feel that in case of an emergency, we could apply for a reverse mortgage." It does make sense, but the reverse mortgage should be made an explicit part of your plan, not just an emergency backup. You can't make interest-only (IO) payments forever, so you want to pay off the loan with proceeds from a reverse mortgage before the IO period ends. As far as I know, the longest interest-only period available today is 10 years. If you take a 30-year loan that is IO for 10 years, in month 121 your payment will rise to become fully amortizing. The new payment will have to be large enough to pay off the loan over the next 20 years. That should not be a problem if you and your spouse are older than 52 now ...
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