Warning: Constant WP_CACHE already defined in /home4/comcompare/public_html/blog/wp-config.php on line 4

Warning: Cannot modify header information - headers already sent by (output started at /home4/comcompare/public_html/blog/wp-config.php:4) in /home4/comcompare/public_html/blog/wp-content/plugins/ip2location-country-blocker/ip2location-country-blocker.php on line 1984

Warning: Cannot modify header information - headers already sent by (output started at /home4/comcompare/public_html/blog/wp-config.php:4) in /home4/comcompare/public_html/blog/wp-content/plugins/ip2location-country-blocker/ip2location-country-blocker.php on line 1985

Warning: Cannot modify header information - headers already sent by (output started at /home4/comcompare/public_html/blog/wp-config.php:4) in /home4/comcompare/public_html/blog/wp-content/plugins/ip2location-country-blocker/ip2location-country-blocker.php on line 1986

Warning: Cannot modify header information - headers already sent by (output started at /home4/comcompare/public_html/blog/wp-config.php:4) in /home4/comcompare/public_html/blog/wp-content/plugins/ip2location-country-blocker/ip2location-country-blocker.php on line 1987
What Is A Balloon Mortgage - The Pros And Cons | CC

What Is A Balloon Mortgage – The Pros And Cons

Amanda Byford
Follow Me

About Balloon Mortgage

Let us learn all about balloon mortgages, why to get them, the advantages and disadvantages of a balloon mortgage, and the things one should pay attention to before you make a decision.

What Is a Balloon Mortgage?

A balloon mortgage is a short-term mortgage usually for 5 to 7 years, but sometimes for as short as 2 years also. 

A loan that has an initial period of low may be interest-only which is relatively low or no monthly payments and at the end of which the borrower is required to pay off the full balance in a lump, some manner is how a balloon mortgage is defined.

Why Get a Balloon Mortgage?

A balloon mortgage is distinct from other loans because it does not fully amortize over the life of the loan. 

Those people who expect to stay in their current home only for a short period of time opt for a balloon mortgage. 

As it comes with low monthly payments and a much lower overall cost, compared to the 20 or 30 years conventional mortgage period a balloon mortgage is paid off in a few years.

A borrower may intend to stay in his home and refinance before the balloon payment is due. He may be expecting a higher income by then, and feel confident to be able to handle a larger monthly payment.

So for example – Suppose a buyer gets a seven-year balloon mortgage to buy a home, the lender will then require him to make equal monthly payments for seven years at a fixed interest rate and the rate will definitely be lower than a traditional mortgage loan at the end of the seven years the borrower has to pay the remainder of the balance of the loan back to the lender. 

The borrower can then pay in full or refinance the loan with the lender or a different lender or simply sell the house.

The interesting appeal of a balloon loan is that borrowers pay an intern for a few years and make no payment for the principle it is no wonder why many finance people also call them interest-only loans. 

In a traditional loan, your monthly payments apply for the interest for the month and partial principal of the loan. 

Normally you take a balloon loan structure for mortgages but is not unusual for borrowers to use this scheme for other types of large loans such as auto loans.

Disadvantages of a Balloon Mortgage

  • Under all the rubble of bad debts, there are thousands of balloon loans, which have gone bad. Many people do not fully understand what a balloon loan is and how a seemingly simple loan could nearly cause the collapse of major economies
  • The risk with a balloon mortgage is, the homeowner will have little or no equity in the house and when he refinances or sells it he would be looking for the amount of the balloon payment.
  • The possibility of the lender not agreeing to extend the deadline on the balloon payment or change the terms of the loan.
  • Expect a huge remaining loan balance at the end of the term that you would have to pay in full.
  • If you get a low-interest loan rate your monthly payments also would below so if you intend to sell the house later, every cost including the interest that you sink into the house could potentially reduce the profit and if you plan to stay in the house you would want to minimize the payment so that you can save money for the lump sum.

Advantages of a Balloon Mortgage

  • If you are a homebuyer who expects to receive a windfall or are looking for a higher income within the next few years this loan could be for you.
  • If you are an individual who often relocates and not planning to stay in your newly acquired home for a long time then you can benefit from this kind of mortgage.
  • A balloon mortgage is beneficial for you if you are in a business and are looking at it as short term financing for your project without handing out collateral.
  • When you compare the eligibility requirement with the traditional loan it is easier for people to qualify for the balloon loan, which means many borrowers will have the chance to get their own home.
  • If a borrower takes out a balloon loan for $300,000 with a term of seven years and an interest rate of 4.5% with an amortization period of 30 years he will not be paying off the loan for that entire 30 years but will only make payment for seven years he would then be left with the balance of $262,598 after 84 months (7 years) of making payment, this will be the total amount that the borrower will have to pay as a lump sum payment for borrowers who are looking for low in fixed interest rates on their loan. This is a fitting financing scheme and also a type of mortgage that is comparatively shorter than most types of loans because the normal lasts for 5-7 years.

To get the monthly payments on balloon loans, lenders usually divide the loan over a standard 30 years period but some lenders use other computation methods such as interest only. 

The borrower can request the lender for a reset so that it automatically recalculate the mortgage at the current interest rate, however, when no such option has been provided it can mean that the buyer will either sell or refinance the home before the end of the term.

This loan widens the eligibility stop of the loan because more people can now qualify to avail of financing. 

So for borrowers who may be low in cash at the moment but are expecting a huge amount to come within the next 5-7 years this alternative home financing scheme is very appropriate.

Conclusion

The unique feature of a balloon mortgage is that it does not fully amortize over the life of the loan ideally the borrower will make a payment over a predetermined period of time usually five or seven years then at the end of the period, he pays for the full remaining balance of the loan at once. 

You can understand that the remaining balance would be huge hence the term balloon payment. 

However, looking at the current situation of the COVID-19 pandemic where many are out of employment it is a risky mortgage for homeowners and lenders.

Amanda Byford

Amanda Byford has bought and sold many houses in the past fifteen years and is actively managing an income property portfolio consisting of multi-family properties. During the buying and selling of these properties, she has gone through several different mortgage loan transactions. This experience and knowledge have helped her develop an avenue to guide consumers to their best available option by comparing lenders through the Compare Closing business.

Leave a Reply

Back to top