What Is a Balloon Mortgage?

This is a type of short-term duration property loan that doesn’t fully amortize over the term of the mortgage. Generally, borrowers make payments over a set period of time. This is typically from two to thirty years. At the end of that repayment schedule, borrowers then have to make a balloon payment, which is the remaining loan balance in full. The remaining amount will most likely be quite large, thus the term “balloon payment”.

This loan type was quite popular before the mortgage crisis. Even if it’s popularity has dwindled, there are still plenty of property buyers who consider this option for financing. The most common reasons why people go for this mortgage type are the interest rates tend to be much lower and you have the option to make installment payments that are “interest only”.

Despite being quite an attractive financing option, you should still give enough time to weigh its benefits and disadvantages so you can properly assess if this is the ideal type of loan for you.

Pros of Balloon Mortgage

  • Lower interest rates
  • Lower monthly payments
  • Fewer concerns about adjustable interest rates
  • Some borrowers provide the option to “reset”, which means they will recalculate the loan using the current interest rate
  • Chances of qualifying for higher mortgage amounts

Cons of Balloon Mortgage

  • A rather large lump sum repayment at the end of the loan term.
  • Borrowers may not have a reset option in their mortgage contract. In this case, the creditor usually expects that the property buyer/lender will apply for refinancing or sell the property before the end of the loan term.
  • It is more favorable for those who are expecting a significant increase in their income in the coming years.
  • You must maintain a good credit score so you have better chances of getting refinancing if required in order to repay the remaining mortgage balance at the end of the term.

Seek Expert Advice

As with all types of property loans, the best course of action is to ask for professional advice on which type of mortgage is best for your financial situation and needs.

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