Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Balloon Loan
When you are looking for options to refinance your mortgage or buy a new home, you may encounter different types of mortgage programs.
In this post, we will know more about one such mortgage program called Balloon loan mortgage.
What Is A Balloon Loan Mortgage?
A balloon mortgage loan is a mortgage often based on a 30 years amortization schedule with the unpaid balance payment at the end of a specific period of time which could be anywhere between 5-7 years.
The balloon loan mortgage may contain an option to reset the interest rate to the current market and extend the due date if certain conditions are met. Basically, you have low, or no payment for a certain amount of time.
This could be ideal for someone who is either living in the home for a short period or someone who is banking on increasing their income over the next few years. However, if the market is declining this mortgage could be very dangerous.
For example, if you got a mortgage for $200,000 with a 5-year term, this means for the first 5 years your mortgage payments would be amortized according to 30 years mortgage and by the end of 5th year whatever the balance amount is reaming you are expected to pay that in a lump sum.
Some balloon mortgage loans have a reset option which takes effect at the end of the loan.
When the borrower requests for a reset, which meant he wants the lender to automatically recalculate the mortgage at the current interest rate.
However, when no such option has been provided, it could mean that the borrower would either sell the property or refinance the home mortgage before the end of the term.
When To Get Balloon Loan Mortgage?
For borrowers who are looking for low and fixed interest rates on their loans, this could be a fitting financing scheme.
This is also comparatively shorter than most types of mortgage loans because they normally last for 5-7 years.
For individuals who are sure that they would not be staying in the property for more than seven years, a balloon loan could be one of the best choices for the mortgage.
A serious word of caution, expect a huge remaining mortgage balance at the end of the term that the borrower has to pay in full.
If you are a home buyer who expects a windfall or looking for a higher income in the next few years, a balloon loan could be for you.
Balloon Mortgage Loan Pros And Cons
Pros
- Affordable initial amount: First off, what attracts borrowers to take this type of loan is the down payment. This feature widens the eligibility scope of the loan because more people can now qualify to avail of financing.
- Low-Interest Rates: it is very obvious that if you get a low-interest loan rate, your monthly payments would also be lower. This is especially favorable for the borrower who intends to sell the house later.
- Easy To Qualify: When you compare the eligibility requirements between a balloon loan and a conventional loan, it is easier for most people to qualify for the former.
Cons
- Higher Foreclosure Risk: Foreclosure is always a risk regardless of the type of home financing, but it is significantly higher in the case of a balloon mortgage loan. The possibility of paying a huge payment at the end of the term is always a big ask and puts your house at foreclosure risk.
Conclusion
From all angles, balloon loans are undoubtedly a whole lot riskier than conventional loans.
If your primary aim is to bring down your housing cost as low as you possibly can, and you are confident that you get out before the balloon payment becomes due, then you can go for it.
However, if your financial situation is a bit shaky and you are the type of person who would worry about not being able to refinance or sell in time, think twice and hard, you might be better off going for a conventional loan.
