Balloon Mortgages-Pros and Cons

Posted by  on Apr 16, 2009

To understand the pros and cons of a balloon mortgage, you must first understand a little bit about what a balloon mortgage is and how it works. A balloon mortgage is one which is amortized over a period of 30 years in most cases, but which is actually a much shorter term, usually about 5-7 years.

The amortization period means that payments are much lower because it is as if you are making payments spread over a 30 year period instead of a much shorter term. Interest rates are often much lower, also, with balloon mortgages than with a conventional mortgage. The amount due at the end of the mortgage term becomes due in one lump sum, or else refinancing is required to pay off the mortgage and begin again under different terms.

One of the primary reasons for getting a balloon loan is an intention to sell the house in question before the loan comes due, providing better loan terms before the time of the sale, and allowing for the repayment of the loan in its entirety before the looming balloon payment comes due. This is perfect for people looking for an investment home rather than a residence, or for those who are looking to “flip” a house.

There are upsides and downsides alike to getting a balloon mortgage, which must be weighed against each other when making the final decision on what kind of loan to get. If you are thinking about getting a balloon mortgage, read on for some important considerations.

Pro: Amortized over 30 years
The amortization means that your monthly payments are lower because you are paying as if you actually had a 30 year term. If you are confident in your ability to refinance, pay the balloon payment or sell the house before the balloon comes due, then you could benefit greatly from these reduced payments.

Con: Amortized over 30 years
On the other hand, if you are planning on living in your home, the amortization means that you will be making lower monthly payments, but at the end of the loan term you will have a huge amount due. If you can pay this off at the time, or if you can afford to pay extra each month with your regular payment, this can be okay, as can the ability to refinance, but if for some reason that is eliminated as an option, you could lose the house.

Pro: Easier to qualify
If you are in need of a loan, balloon mortgages are actually often easier to qualify for than a traditional mortgage, which means that you might be better able to get into your home. If you are confident that you can refinance before the end of the loan because of a known change in circumstances (an expected jump in income, for example), this can be a big boon.

Con: Easier to qualify
If you are not sure that you can repay the balloon payment, however, a balloon mortgage can be big trouble, and taking it just because you can, could lead to trouble down the road, from selling at a loss to being foreclosed upon if you are unlucky. The best outcome that you can hope for if you get to that point and cannot refinance is selling at a gain and hoping that you have learned better for the next time, but this still means losing your home.

Pro: Low interest rates
Low interest rates mean that your monthly payments are lower, which is especially good if you are looking to sell the house, since every penny of interest on your mortgage payment cuts into your profits. If you are planning on keeping the house, you will need payments as low as possible in order to pay off the mortgage before the balloon payment comes due, or to refinance for as low amount as possible.

Deciding how to purchase your next house has a lot to do with what you plan on doing with the house, and how you plan on handling the loan. If you know that you are going to get a raise within the next couple of years that will allow you to refinance easily, and you can keep that in mind and keep your credit score spotless until then, a balloon mortgage might be perfect. Look carefully at your circumstances and your finances and the future potential of your finances when deciding how to proceed. Your lender can also help you choose the right mortgage for you, and will gladly assist you in weighing the pros and cons of a balloon mortgage for your next home purchase.


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