Here’s All You Need to Know About Balloon Mortgage

A balloon mortgage is a short-term home loan that is similar to a traditional fixed mortgage. However, unlike a fixed mortgage, a balloon mortgage is not a full paid term. The mortgage holder must instead make a payment to cover the rest of the principal. This type of mortgage may be beneficial for some. However, it is not without disadvantages. Before we discuss the advantages and disadvantages, let us discuss balloon payments and what it is actually.

When it comes to balloon payments, you must pay at least twice as large as your regular scheduled payments. When you make one large lump sum payment, it can allow borrowers to minimize the loan repayment costs in the earlier stages of loan payment. Balloon loans boast shorter terms than traditional installment loans, with large payment options due after the initial few months. Balloon payment structures primarily cater to business loans and, in some cases, auto loans and mortgages.

All About the Mortgage

The reduced payments may be a riskier proposition than the traditional installment loans. That’s because one has to cough up a huge payment towards the end of the tenure. You have to have a good credit score to avail of this loan and a good income stream. You also have to check whether balloon payment mortgages are allowed in your state. Besides that, you have to pay a large down payment to qualify for the same.

Lower Interest Rates

The best part of balloon mortgages is that they have lower interest rates than other mortgage payments. There is also a possibility that you might qualify for a balloon mortgage at a fixed or adjustable rate while seeking a mortgage loan. These mortgages are mostly suitable for hard up on cash and expect a sizeable capital amount before the term veers towards an end. It is also ideal for those people who want to sell off the house during the loan term.

Drawbacks

Balloon mortgages are not without many risks. As they do not pay down much of the principal, mortgage holders are in a great amount of financial obligation at the end of the loan’s life. If one cannot pay off the substantial principal amount in one lump sum, they must try their hand at refinancing. If the interest rate rises ever so significantly in the interim period or the borrower’s credit rating slumps since the loan granting of the loan. They may be looking at mortgages with difficult terms.

The Reset Option

Many balloon mortgages have a ‘reset’ feature that helps the holders reassess the current interest rate to the present market rate until the loan amortization tenure. However, the mortgage holder may have to cater to certain conditions. She may have to own and occupy the home, have been able to make the payments within the stipulated time frame, and haven’t incurred any liens on the property.

A Complex Financial Product

Not everyone is suited for balloon mortgages. This is because it is a complex financial product, and only those with a stable income qualify for the loan. This type of loan is best suited for investors who want to reduce short-term loan costs and free up capital. When it comes to businesses, balloon loans are good for companies with specific financing needs and a steady future income.

The average borrower can only opt for it when they know what this type of loan is all about and what they are letting themselves in for. If you are looking to purchase a house or a car, you can chalk out a monthly budget to pay off the loan from your current income. You can also try and save for a bigger payment if you are not in a hurry to make a specific purchase.

This will help you go for an expensive asset with a much lower monthly payment scheme. Also, since there is no guarantee that you will get a  refinance to move the debt obligation, it is best to think it out and then opt for it. Like we said, always chalk out a budget before opting for a balloon mortgage. And don’t forget to run this through your financial advisor to understand if a balloon mortgage is the best loan option for your financial needs.