Balloon Mortgage Facts

When you’re shopping around for mortgage loans and alternatives to traditional mortgage loans, you may come across the term balloon mortgage. Chances are that you will either be told the good news, which is that balloon mortgages typically have low monthly payments, or the bad news, which is that the full amount of the mortgage is due within five to seven years. Depending on your financial situation, a balloon mortgage may be a viable alternative, and you owe it to yourself to research this and all loan options thoroughly before deciding. The following information can help you make a decision about whether this type of mortgage loan is best for you.

• With a balloon mortgage, the payments are calculated in a method similar to that of a fixed-rate mortgage. When you make monthly payments, you pay as if you would be paying the mortgage for 30 years. However, you don’t have 30 years to repay the mortgage. After a specific period of time, the remainder of the balance must be repaid. If, at the time the loan comes due, you are still in the house, you must refinance a balloon mortgage.

• In general, it is easier for homebuyers to qualify for a balloon mortgage than it is for a 30 year fixed-rate mortgage. This is one of the reasons some homebuyers choose to obtain a balloon mortgage. If, during the life of the loan, you continue to improve your credit and other qualifying factors, you may be able to refinance the balloon mortgage for a new mortgage, often with better terms.

• Balloon mortgages are riskier for homeowners because the life of the loan is shorter than many other loan products. While, it can be fairly easy to make the monthly payments on the mortgage, there could be difficulty once the loan matures.

• At the time of the balloon mortgage maturity, you have several options from which you can choose. You can sell your home, covert your balloon mortgage to a traditional mortgage, or refinance the mortgage. Of course converting the mortgage and refinancing it are both subject to credit approval. In addition, you could run into costs associated with the loan transactions.

• It can be difficult to predict what market interest rates are going to do in the future. They could decrease, but they could also increase. When you have a balloon mortgage, you have to be concerned about future interest rates because you will be subject to them when the loan matures. There is always the possibility that your loan could come due at a time when there are high interest rates. Since you don’t have a rate locked in already, you may be forced to qualify for those higher interest loans.

Although there are many risks associated with a balloon mortgage, this type of loan may be ideal for those who are unable to make large mortgage payments now, but know that they will be able to do so in the foreseeable future. Your real estate agent and financial advisor can help you decide whether or not a balloon mortgage is the best type of loan for your financial needs.