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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127220  
Subject: Re: Steps to take Date: 1/19/2002 6:45 PM
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Hi ACME,

This is the one thing that would make me nervous about the loan Dave mentioned in one of the early posts of this thread - the interest only loan. It seems like if you only put 5% down and take out an interest-only loand...a set-back in the local real-estate market could throw you upside-down pretty quickly.

AN interest-only loan would ONLY be dangerous to someone who counts on being FORCED to save their money or repay their principal (perhaps because they otherwise know they are not well disciplined.)

In a regularly ammortized loan you are forced to pay back the principal a little every month, and you get no further benefits from that principal. (Of course, you also no longer pay interest on it.)

With a loan that allows interest-only payments you are left with the benefits of the principal IF YOU WANT IT! You are always allowed to repay the principal the same as you would have (or more) as though the loan were regularly ammortized.

So... if you see this... the loan simply offers additional benefits to borrowers who are disciplined enough financially to decide how they want to use their money, rather than being FORCED to repay their principal. If their discretion is that the best place to put their money is in returning principal, they are FREE TO... but not FORCED TO.

If a Fool chose to take the funds they would have normally paid toward principal and invest them in stable growth vehicles, that Fool would be FAR better off should the real estate market go "upside down" on him than if he had allowed the funds to be forcefully paid back toward principal (which he would thereby have no access to.)

So... the interest-only loans give you more options, but take NOTHING away... and if Foolishly applied make your position SAFER in a down market.

Make sense?

Cheers,
Dave
FMB
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