The Creative Investor - Interest Only Loans

I used to think Interest Only loans were the worst possible way to finance a property. You are really in essence renting from the bank instead of a landlord. Why would you do it??

The first time I saw Interest Only Loans used was when I went to California to visit a friend. He was telling me that everyday people couldn't afford to purchase a property with a conventional loan let alone a low-interest loan, so many people were resorting to Interest Only Loans.

I thought this was crazy.

I was pretty shocked by how this

was totally upside-down from our area in Greensboro, NC.

Now of course in GBoro, the economy is not that of California. Properties aren't increasing by double digits, but at least they haven't been stagnant either.

Either way, I was watching TV this weekend and saw an ad for an Interest Only loans for our area.

With a new property foreclosure we are about to purchase, I was wondering how I could our company could use a Interest Only Loan to our advantage. Here is what I came up with:

When you pay a normal loan, the Interest that you pay is huge compared to the principle that you pay. But by the 10th year of your amortization, you are contributing a larger portion to Principle than Interest.

Don't let me lose you now. If your using an Interest Only Loan that cuts your monthly payment down by 40%, then that means if you pay what your normal payment would be, your principle contribution would be significantly higher than what a conventional amortization would be. Much Larger!

If your monthly payment is 1000/m and the IO loan brings your payment down to 600/m. This means if you normally pay the 1000 per month even though your normal payment is 600. You are really knocking down your principle.

It is just like coming in on a 30-year loan at the 7-10 year mark.

WHAT DOES THIS MEAN FOR YOU?

It means that for the first couple years, you can really knock down your principle faster than a conventional mortgage. Then after 2-3 years, refinance to a conventional 15 year mortgage.

Now these are ONLY thoughts I had this weekend while reflecting on my refinance. I haven't verified that the Interest-Only Lenders don't have a pre-payment penalty. But I would assume that they would have one in place to protect themselves from guys like me who don't want to be screwed when it comes to paying my debt off.

What are you thoughts?

Interest Only Loans - Good or Evil?