[RebelBanker]

An interest only loan depends on the property gaining in value for the owner to be able to recover his investment (after selling costs). If the value declines, the loan could easily be greater than the value - a condition known as "under water." If the owner is paying down principal on the loan, he is building equity in the property which can keep the loan to value OK.

[riverdawg]

"If the value declines, the loan could easily be greater than the value ..."

This could be true whether or not you are making "equity payments" along the way. If housing prices are falling, you are losing the same amount of "equity" (housing wealth) whether you choose to take the loss in small, monthly lumps (with a conventionally amortized loan) or at the end (with an interest-only loan) when you have to sell the house for less than you paid.