What is a Balloon Mortgage?
A Balloon mortgage is a real estate loan with a low or no monthly payment term that ends with the borrower having to pay off the entire total in one lump sum. The interest rate given is frequently low, and the monthly payments, if any, may be interest only.
Balloon mortgages offer short-term benefits, but they are dangerous for both homeowners and lenders.
Balloon Mortgage Definition
A balloon payment mortgage is one that does not amortize completely during the duration of the loan, leaving a debt due at maturity. Because of its enormity, the final payment is referred to as a balloon payment. In commercial real estate, balloon payment mortgages are more widespread than in residential real estate. The interest rate on a balloon payment mortgage can be fixed or variable.
Why Get a Balloon Mortgage?
A balloon mortgage is an option for people who only plan to stay in their house for a limited time. Because it is paid off in a few years rather than 20 or 30 years like a traditional mortgage, it has minimal monthly payments and a considerably reduced overall cost.
Others might plan to stay put and refinance before the balloon payment is due. They may be anticipating a better income by that time and are certain that they will be able to afford a larger monthly payment. They may also predict a drop in interest rates.
A professional whose primary source of income is a year-end bonus is another type of homebuyer who would be interested in a balloon mortgage. If the bonus is certain, the buyer will be able to move into the house sooner.
How do you pay a Balloon Mortgage?
When it comes to paying off a balloon mortgage, borrowers typically have three options:
If you can afford it, the simplest solution is to pay off the outstanding debt in full. If you had planned ahead when you took out the loan, you would have been saving and investing with this short-term time frame in mind. Or perhaps you anticipated a significant increase in your income or the receipt of a windfall money by this time.
Pay off this loan by taking out a new one, most likely a more traditional fixed-rate loan with an amortization schedule. If you have a reasonable amount of equity in your house, a consistent income and/or other assets, and a strong credit history, this plan will work for you. Keep in mind that your monthly payments will be higher as a result of this.
Pay down the debt with the proceeds. Many people who choose balloon mortgages only intend to stay in their property for a few years, roughly the loan term.
House flippers, those who acquire, refurbish, and sell homes also employ balloon mortgages as a source of funding.
For more information on Balloon Mortgages, contact the mortgage experts at Mortgage Rates Today!
Last Updated on 05/25/2022 by Mark Verhoeven
Financial Consultant and Author