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Yes, I would definitely go with an Interest Only loan, if it were fixed for 30 years. The short explanation is that if I borrow $500,000 today, in 30 years, the inflation erosion of those funds means that $500,000 will be similar to say $50K these days.
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Wayne, you're assuming inflation -- which really hasn't been a big deal for a number of years in our economy. Here's the OMB's inflation chart which shows an inflation rate of 2%-3%.
Forgive me, but I'm digging back 10 years into one of my weaker classes (Finance).
- The NPV of $500,000 30 years from now is $205,993, not $50,000.
Without going through the math, yes using OPM (other people's money) to invest (aka: Leverage) can significantly increase your returns. But the other thing that it does is significantly increases your risk exposure. Assuming everything goes well, you can actually get a 30 year, interest only loan (a quick search suggests that a 10 year interest only period is more like the norm, after which the interest rate goes up or some portion of the principle starts to become due) and the property values go up as expected -- you're golden. But if all of those things do not happen as planned, you can wind up deeply in hot water, with rising payment due, no equity built up in the house or debts greater then the value. This is one of the things which is contributing to the growing rate of mortgage foreclosures of late. Keep in mind that leverage is just as strong in the negative direction as it is in the postive direction.
It sounds like a remote chance, but if you then consider that many people's financial portolio (if they have one) is often comparably risky with a large portion of their money in a few individual stocks which may have similar betas, or a single family business. The next thing you know, you may have significant exposure to an economic downturn.
I'm not saying that it's a bad deal, just that people need to carefully consider their family's financial security carefully before they go down that path.