Advantages and Disadvantages of Balloon Mortgages
September 11th, 2013
September 11th, 2013
Are you looking for a home loan? Have you been searching the Internet for information about the different types of mortgages available? Maybe you’ve come across information on mortgages with a balloon payment, and wondered, What’s that and would it be a good option for me?
A balloon mortgage is a short-term home loan that’s similar to a traditional fixed mortgage. However, when a fixed mortgage comes to the end of its term, your mortgage is paid off. With a balloon mortgage, you must make a large payment at the end of the term to cover the remaining principal on the loan. Generally, this payment can be more than 1-1/2 to 2 times your monthly mortgage payment. However, more often, it can mean you owe thousands of dollars once your loan comes to term.
Now, you may be thinking, Well, how can there be an advantage to that?
The biggest advantage of a balloon mortgage is it generally comes with lower interest rates, so you make smaller monthly mortgage payments. You also may qualify for a larger loan amount with a balloon mortgage than you would if you got an adjustable-rate or fixed-rate mortgage.
Additionally, this type of mortgage may be beneficial if you plan on selling your home before the balloon payment is due; and you think you’ll make a profit on the home. Or, perhaps you’re not making as much money now, but you expect to be bringing in a higher income by the time you need to make the balloon payment.
While there are some advantages to this type of mortgage, there also are some drawbacks as well.
While your mortgage payments may be calculated on an amortization schedule of 15 to 30 years, generally, balloon mortgages mature and came due within five to seven years.
So the biggest risk is you have to have the money saved to make the large balloon payment. Unfortunately, you can’t really predict what the future holds. If you don’t have the money, you’ll have to refinance or sell your home. If interest rates have risen or your credit rating has gotten worse during the time of your loan, you may not be able to get a new mortgage with affordable terms. And, you can’t know for sure that you’ll be able to sell your home quickly before the balloon payment is due. So, if you can’t make the payment, sell your home or refinance, you run the risk of losing your home.
Another huge disadvantage is since you’re primarily paying interest with your monthly payments, you’re not accumulating any equity in your home.
Another consideration is that some balloon loans come with a “reset” option at the end of the set term. This option allows your interest rate to be reset based on current rates and the amortization schedule to be recalculated based on a remaining term. However, if your balloon loan doesn’t have this reset option (or sometimes even if it does), you’ll be expected to sell your home or refinance the loan before the end of your original loan term.
After considering the advantages and disadvantages, the bottom line comes to this – you need to determine if a balloon loan is right for your needs. If you know you’ll be selling your home before the term of your loan ends, then a balloon loan may make sense for you. However, if you’re not sure what your future holds, then you need to plan for how you are going to make the balloon payment when it comes due and save accordingly. Or, if you don’t have the money by the end of the term, then a balloon loan could cost you a lot more time and money to refinance.
If you need help determining if a balloon loan is right for your mortgage needs, contact the senior mortgage specialists at Grandview Lending. We can answer your questions and provide advice concerning your particular situation.
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