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The Facts about Balloon Mortgages

Posted by  on Apr 16, 2009
 
The Facts about Balloon Mortgages

There are many different mortgage types out there which leads to a plethora of choices when it comes to the various mortgage options people can choose from. In order to obtain the best mortgage for your financial situation you must learn about all the types and options you have in order to find the best fit for you and your family. One popular option includes the balloon mortgage, which could be a perfect choice for your mortgage needs.

What is a Balloon Mortgage?

Balloon mortgages are still a typical fixed rate mortgage but they differ in one major way from normal everyday mortgages. Balloon mortgages offer a lower rate leading to lower monthly payments, but the balloon term comes from a large “balloon” lump sum that needs to be paid within a certain amount of time (usually around 7 years). If you opt to take out a Balloon loan and can’t repay the amount specified within 7 years you would need to refinance the mortgage.

The balloon mortgage agreement works well if you plan on selling your home within the seven year time period. Because you will then have the money to pay off the balloon payment, you will have saved yourself money in the process by paying the lower mortgage payments. Let's look at an example to help this make sense.

These mortgages are great if you do not plan on staying in your house for more than 7 years, because by that point you would have sold the house and repaid the remainder of the loan. By opting for a balloon mortgage you will have saved a large amount of money from interest over the course of the loan. Here’s an example that illustrates a balloon loan.

If you borrowed $200,000 at 6% over a 30 year period the payments would be about 1200 a month. At the end of a seven year period, a large lump sum would need to be paid, since you would have paid off about 20,000 in principle, the remainder of 180,000 would have need to be paid by then or be available to.

Are You a Good Fit for a Balloon Mortgage?

Unless you are certain you are going to be out of the home within a 7 year period a balloon mortgage does not to prove to be too helpful of a situation. The idea of paying off the house after 7 years can prove very stressful on someone’s financial situation and can hurt a person’s credit if they cannot afford to pay the loan off. However if you plan on selling within a few years these can prove a very helpful option.

If you are not sure whether you will stay in your home or move within the fixed time frame you should probably stick with an ARM (Adjustable Rate Mortgage).This provides you with a low rate in which to save money in the long term, as long as the mortgage rate doesn’t go up, whereas a balloon rate definitely increases the mortgage rate after 7 years if the large lump sum is not paid.

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