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BALLOON MORTGAGE

What Is a Balloon Mortgage?

A loan with an initial period of low or no monthly payments, at the end of which the full balance needs to be paid off in a lump sum by the borrower, is called a balloon mortgage. If there are monthly payments to be made, they may consist only of interest with a relatively low-interest rate. These mortgages are, however, risky for all parties included.
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Balloon mortgages may have variable or fixed interest rates and can vary in structure with different maturities and terms for homebuyers. The borrower may be required to make the principal and interest repayments when the loan matures for some short-term loans without amortization during the loan life.

Why Should You Get a Balloon Mortgage?

A balloon mortgage is suitable for people who don’t expect to stay in their homes for a long period of time. Due to low monthly payments and usually shorter loan life than with conventional mortgages, its overall cost is much lower. The usual loan life of balloon mortgages is around five to seven years, although terms as short as two years are not uncommon.

 

The borrowers should refinance before the payment is due if they intend to stay in their homes. They may be able to handle a larger monthly payment by then if their income can rise.

 

Since the real estate market can be unstable, this type of mortgage carries a lot of risks for the borrower. However, these risks are apparent. With little to no equity in the house, the homeowner could plan to sell it or refinance it to cover the amount of the balloon payment. This might not be possible in a declining or slow market. Even if possible, the buyers who wish to sell the house would find this alternative unappealing. The lender may not agree to change the terms of the loan or extend the deadline on the balloon payment.

 

Homebuyers whose main source of income is a year-end bonus may also find balloon mortgages appealing. The buyer will be able to get into the home earlier if the bonus is certain.

Balloon Loans for Business

To obtain financing for construction projects, businesses in the construction industry often use the balloon mortgage as they don’t require offering collateral. These generally short-term loans, unlike collateralized conventional business loans, have higher interest rates. By using the newly built structure as collateral, these companies could refinance with a lower-rate mortgage after taking out a loan for 12 or 18 months.
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