The Pros And Cons Of Balloon Mortgage Rates
A Brief Introduction to Refinancing
If you have ever been to a childs birthday party, you will notice that no party is ever complete without balloons. The concept of balloon mortgage is pretty much like a, well, balloon. Before it is inflated, a balloon is flat and relatively shapeless. Once air is blown into it, it grows into a big ball of air. A balloon mortgage is basically a mortgage program that allows you to make monthly payment at low interest rates and at the end of the pay back period you are to make full payment in one lump sum. Balloon
mortgage rates are relatively lower than conventional fixed-rate or adjustable rate mortgages.
Typical
mortgage rates allow for a loan term or pay back period of 15 to 30 years. Balloon mortgages allow you to pay off your debt in 15 years but with the monthly installments of that of 30 years. How is that possible? Lets look at an example. Say your total mortgage inclusive of interest is roughly $250,000.00. With a pay back period of 30 years, you will have to pay about $695.00 a month. A balloon mortgage 15-year program allows you to make monthly payment of the same amount so after 15 years youd have already paid $125,100.00. What about the balance? At the end of the 15-year loan term, you will have to pay the balance of $124,900.00 in lump sum. That is how the 30/15 program works.
One of the many benefits of a balloon mortgage is that the
mortgage interest rates to purchase home are relatively lower. This is because you are expected to pay the balance, which will most probably be the principal, all at once at the end of the pay back period. You will be paying the same or perhaps lower interest rate as you would a 30-year payback period in just 15 years. Obviously, your loan term will be shorter too but with the benefits of a longer loan term. You need to remember, though, that at the end of the 15-year loan term you will have to pay off the balance all at one go. So you will need to have proper and secure financial planning in order to be able to make that final payment at the end of your loan term. You will also probably be grateful that the interest rates will not be raised even when the current national interest rate is on the rise. As it is with fixed-rate mortgages, your interest rate will stay the same throughout the duration of your pay back period whether it is 3, 10 or 15 years.
Balloon mortgages are not all beds of roses. There are some drawbacks for you to consider and take into account when deciding to sign up for it. Granted that the monthly payment is significantly lower than any other types of mortgage plans, but you have to have the financial ability to make the final payment in full once the 15-year loan term is over. So if you already have a plan on getting the huge amount of money to make that final payment then you are good to go. However, if you are expecting to obtain the money through inheritance or chance that you are not even 80% sure of, you will be taking a dangerously big risk. Whether you have the money or not, your lenders will collect on the final payment when it is due. You might plan to refinance your balloon mortgage before the term is over but you have to be sure that your lender allows it before you even sign up for the balloon mortgage in the first place. This is because lenders generally would not allow for the refinancing of balloon mortgages due to the fact that the monthly payments were already as low as it could get.
If your lender does allow you to refinance your entire balloon mortgage, you will end up paying more money than originally planned due to the cost of refinancing and probably higher interest rates. So before you sign up for a balloon mortgage, you have to make sure that you have weighed in all your options and that you are not setting yourself up for a financial trap that is going to bring the whole of your financial ship down.
It is a good idea to get a balloon
mortgage loan rate quote to get a clearer picture on the entire program so you will have the proper and relevant information to plan your future payments. Basically, if you are not sure that you could come up with the lump sum final payment figure by the end of the agreed loan term, it is best that you seek other alternative to finance your home purchase.
by: Ask Bill
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