Balloon Mortgages
Balloon Mortgages are radically different from the more
conventional Fixed-Rate or
Adjustable Rate mortgages. In a balloon mortgage,
you typically have a low, fixed interest rate and monthly payment for a period
of time, usually, 3, 5, or 7 years.
However, unlike conventional mortgages, at the end of the
life of the loan, the entire balance becomes due and the borrower is either
obligated to pay off the loan in full from their savings or to refinance the
balance.
The most popular loan terms are 5/25 and 7/23. In these
examples, the borrower would make their low monthly payments for 5 or 7 years,
respectively, and then pay off or refinance the remaining principle the
remaining years. Balloons with a refinance option allows borrowers to convert
their mortgage at the end of their balloon period to a fixed rate loan.
Although this is a much less conventional option, there
are a few advantages to this type of loan:
- Keeps your initial monthly payments at a minimum until
you can afford to make higher monthly payments
- A larger share of your payment may be eligible for the
mortgage interest tax deduction
- Initial interest rates are typically lower than a
conventional loan
- Allows you to buy more house than you would typically
qualify for with a conventional loan
- These loans are usually a last resort for people that
can’t get a conventional loan
Of course, there are some disadvantages that come with
this type of loan as well. Because you are banking on increasing income after
the initial period you run the risk of not being able to refinance if your
situation does not improve which means you may lose your home.
Another popular variation of a balloon mortgage is an
Interest-Only Loan.
Be sure to read our other mortgage advice articles:
Fixed Rate Loans
Adjustable Rate Loans
VA Loans
FHA Loans
Convertible Mortgage Loans
Negative Amortization Loans
Graduated Payment Mortgages
Buy-Down Mortgage
Jumbo Loans
2nd Mortgage Loans
Please visit our sponsor page if you are
interested in learning more about affordable mortgages!
