A recent column warning about the hazards of interest-only mortgages drew a number of objections from readers who think these loans offer a terrific investment opportunity.

Is this true?

You can make a case on paper, but I don’t think it’s compelling for ordinary folk.

With standard mortgages, monthly payments apply to both interest and principal – the amount borrowed. Payments on interest-only mortgages cover just the interest for a number of years. The delay in starting principal payments reduces the required payment during this period.

But over the life of the loan, interest charges are higher, since it takes longer to whittle the debt. Also, many IO loans allow rates to rise after the initial period.

As I noted recently, monthly payments on $100,000 borrowed for 30 years at 6 percent would be $600 with a standard loan, $500 with an interest-only loan. By investing the $100 saved, the homeowner can more than make up for any bigger loan payments later, according to the IO advocates.

But for this to work, the investment return must be higher than the interest rate on the loan, and you have to take into account both the initial rate and the rate you might have to pay after the interest-only period ends.

With the regular mortgage in the example, every dollar paid in principal saves the borrower 6 cents a year in interest. That’s the same as earning a 6 percent investment return. And that’s a guaranteed return – like putting your money into a bank account. You won’t find any bank offering 6 percent these days.

To get a higher return to make the IO investment strategy pay, you’d have to invest in something riskier, such as stocks.

The IO strategy boils down to investing with borrowed money – and that’s dangerous.

Making bubble money

In another recent column, I looked at some evidence suggesting that rising home prices constitute a bubble. Obviously, people who buy homes at inflated prices can lose money. Is there any way to make money on a housing bubble?

Yes. I don’t recommend this kind of high-risk bet for ordinary investors, but it’s interesting to see how it could be done.

One method is to “short” the stocks of major home-building companies, betting that those soaring stocks will fall back to earth.

In a short sale, a speculator borrows shares of a specific stock from a broker and sells them, hoping to repay the broker with shares bought later at a lower price. It’s buying low and selling high in reverse order – sell high and buy low.

But here’s the problem: Your potential profit is limited, while your loss is not. If you bought shares at $10 each, the most you could make is $10 a share – if the price fell to zero.

But suppose shares rose to $50? You’d pay $50 a share to replace the ones you’d borrowed and sold for $10, losing $40 a share. Since there’s no limit on how high the shares can go, there’s no limit to your potential loss.

Another strategy would be to buy “put” options on home builders’ stocks. These give you the right to sell a block of shares at a set price within a given period. If the price falls, you buy the shares and exercise the put to sell them at the higher price. But if the shares don’t fall, the put will become worthless and you’ll lose all the money you’d bet.

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Reminder: Get those summer-job entries in.

A while back, I asked readers to describe the summer jobs they’d had – the best, worst, the most educational, the biggest waste of time …

Entries are pouring in, and the Friday deadline is looming.

I’ll pick a winner, and put it and the runners-up in the paper. We’ll post many of the other entries on our Web site. There’s no prize – just a chance to tell the world how you spent your summer vacation. Use the address below.

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(Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at brownjphillynews.com.)

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AP-NY-06-27-05 0626EDT