What Are Balloon Mortgages?
There are many different types of mortgages. A balloon mortgage is different from a 30 year fixed mortgage. With a balloon mortgage the payments are calculated the same way as with a fixed mortgage, but the actual payoff date is much sooner than 30 years. Balloon mortgages have their advantages and disadvantages and homeowners should really weigh their options before making a decision about which type of mortgage to choose.
With a fixed 30 year mortgage the homeowner will make regular payments until their last payment in 30 years. Their payments are all the same, with respect to the interest rates and such, and even the last payment is going to be the same or close to the other payments made.
A balloon mortgage is done for a short period time, usually less than 15 years. With this type of mortgage the homeowner makes regular payments until the last payment which is then the remainder of the loan due in full.
There are two ways to deal with a balloon mortgage. The homeowner can pay off the loan at the due date or they can refinance to pay it off. However, the lender can deny refinancing due to credit history which can likely change since the beginning of the mortgage. Any late payments could effect the decision of the lender about refinancing eligibility.
Balloon mortgages offer the benefit of costing less than fixed mortgages. Instead of paying interest for 30 years a person is only going to pay for half or less than half of that time. This can save a lot of money when speaking in terms of $100,000 loans typical for homes. Many people choose a balloon mortgage because the payments are often lower than with a fixed loan due to the lesser amount of interest. Balloon mortgages are typical, though, when a person is not planning on still owning the house when the mortgage comes due. This makes a better deal in the end for them.
The downfall of balloon mortgages is obviously coming up with a way to pay off the loan. After a short period of time like 15 years or less, the outstanding balance is still going to be quite large. Unless a person is absolutely sure they will either sell or be able to afford the balloon payment at the end of the mortgage then a balloon mortgage may not be the best idea.
Balloon mortgages are something that is an option and work for many people. It all really depends on the homeowners situation and future plans. It is possible to end up in a bad financial place if planning for the end payment is not done, so planning is an essential part of balloon mortgages.
by: James Copper
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