An Overview of Balloon Mortgages
A Balloon loan is a kind of short-term mortgage that shares some of the same qualities as fixed-rate mortgages, except for the fact that they are non-amortizing. Although this type of mortgage is typically easier to qualify for when compared with the more conventional 30 year fixed-rate loan, balloon mortgages are not totally paid off at the completion of the loan period. Upon finishing the length of the loan term, there is still a lump sum-payment that must be paid (the balloon payment). An example would be having a normal monthly mortgage payment of $550 per month, but then having to pay a final payment (the balloon payment) of $2,500.
Are There Any Advantages to a Balloon Mortgage?
The majority of borrowers make us of the balloon mortgage when they are planning on selling their house before the actual balloon payment is due. An example of this is a homebuyer that knows his or her employer will relocate them to a different city after a certain number of years; they will opt for the balloon mortgage. Balloon loans also typically offer the borrower a pre-determined, non-negotiable refinancing option in case they have difficulties in paying the final balloon payment.
What about the Disadvantages?
There are numerous risks that are associated with balloon loans. For instance, when the loan term has come to conclusion the borrower is required to completely pay off whatever the remaining balance is, according to whatever certain arrangements they had made beforehand. So it is because of this that many people are hesitant to jump into a balloon mortgage, and for good reason. For the borrowers that are unable to pay for the balloon payment, they are forced to either refinance their home, sell it, or alternatively convert their balloon mortgage to one of the more traditional mortgage types (at whatever the current rates of interest are at the time). Additionally, because a balloon mortgage does not do much in regards to paying a borrower’s principal, they are not viewed as efficient ways to build equity in the home.
Final Thoughts
If you are considering going the route of balloon mortgages, you should sensibly weigh out all the options available to you beforehand. A balloon loan makes sense if the borrower is certain that they will be selling the house before the loan term expires. Usually in other cases, there are much more practical options though that one should look into.
