| Balloon mortgage loans offer home buyers a little breathing room in their mortgage budget. Still, balloon financing requires a bit of caution and planning. Balloon mortgage loans allow homeowners to make payments that are less than the amount needed to satisfy the debt. In exchange for that convenience, homeowners agree to make a balloon payment at the end of the loan term.Yes, the convenience of smaller payments is great at the outset but home owners may risk losing their homes in the long-term. If you are considering balloon financing, here is what you should know.
Part of the appeal with balloon financing is the opportunity for smaller payments, at least initially. At the end of the loan term the borrower will need to make a balloon payment (a lump sum payment that pays off the entire balance of the principal).
Homeowners who do not intend to be in the home at the time the balloon payment comes due may find balloon financing a good option. On the other hand, for the homeowner that does remain in the home the financial burden of making a balloon payment can be a daunting prospect.
There Are Alternatives for Homeowners Unable To Make Their Balloon Payments
The most obvious course of action, if a balloon payment is looming large, is to refinance. Talk with a lender about fixed or adjustable rate mortgages that can help you finance the principal. Just as with your balloon financing, this refinancing will require a fair amount of time and paperwork. You should also be aware that you will need to pay for closing costs or roll them into your loan.
If you aren’t sure what the future holds but you think a balloon mortgage loan may be for you, talk with your lender about a convertible mortgage. In some cases convertible balloon mortgage loans may be converted to fixed rate loans after a pre-determined period. Convertible Balloon Mortgages (5/25 and 7/23) - an increasingly popular option - may help you avoid the balloon payment but not the risk associated with balloon mortgage loans. Why? Interest rates may eventually make your monthly payments unmanageable.
A Balloon Mortgage Calculator Can Help You Decide if Balloon Financing is Right for You
The risks and rewards with balloon mortgage loans are pretty clear:
- Risk – Homeowners may be unable to pay off the principal when the balloon payment is due. Interest rate changes may make monthly payments unmanageable. Late payments may make refinancing difficult.
- Reward – Homeowners enjoy smaller payments and more flexibility in their housing budgets with balloon financing.
The costs associated with balloon mortgage loans are not always as clear. Use a balloon mortgage calculator to:
- Research the best balloon mortgage rates for your situation.
- Compare balloon financing costs to fixed or adjustable financing for the best deal.
- Calculate your monthly payment amount over the term of the loan
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