Having trouble deciding if a balloon mortgage can meet your financing needs? We discuss the balloon mortgage pros and cons of making the right decision.
If you know about different types of mortgages, you will know how traditional mortgage loans work. You need to make regular monthly payments and keep up with your mortgage schedule. Failing to make on-time payments on time can lead to home foreclosure.
Do you think the conventional mortgage method is not something you would want? If so, you don’t have to give up on your desire to become a homeowner. Why? Because you can go for the balloon mortgage.
A balloon mortgage is a type of home loan where you have to make very little to no monthly payments. The only mortgage expense you may have is making the interest payments and nothing else.
Now, are you thinking, “Is it just like the interest-only mortgage?” Well, it’s not. Because, unlike the interest-only mortgage, you don’t have to make monthly principal payments after the initial phase ends.
So how will you repay your balloon mortgage loan? The remaining amount will be paid in a lump sum.
Confused? Here’s an example to understand better. Suppose your lender has approved a loan of $200,000 with a term of 10 years and an interest rate of 6%.
Now, as you are paying the interest rate for 10 years, it combines to $12,000. So after 10 years, when you have to pay off your loan, you’ll need to pay the remaining $188,000 in a lump sum.
That was all about the process of a balloon mortgage. But to know whether it’s the right option for you, we are talking about some of the balloon mortgage pros and cons.
Let’s start discussing the balloon mortgage pros and cons by first talking about the benefits you get.
Not having to pay monthly montage will enable you to save a lot of money during the initial period. Thinking about ways to spend your savings?
Most real estate investors go for one of two options.
You can either hold some of your expenses and save them for when you need to pay the entire mortgage loan in a lump sum.
Don’t you think you can save for that long? Here’s another idea. Use those savings to invest in a second home. Sell your house before the principal payment period starts and move into the home you invested in.
Did You Know
Balloon mortgage loans also come without any interest payments in the initial period. You might not even have any monthly mortgage payments to deal with.
Speaking about the balloon mortgage pros and cons, can you have a fixed or adjustable interest rate? This can help you capitalize and lock in a lower rate by using a fixed interest rate.
If you think the rate is high, you can choose an adjustable interest rate and hope the interest rates will come down.
Are you planning on living in your new house for a limited period? If you are, a balloon mortgage allows you to move out even before paying the full lump sum amount.
This means you can relocate without paying a massive amount. All you need to do is find a buyer for your home at the right time before the principal payment period is about to start.
Paying off the entire mortgage amount at once can be a huge financial burden. And with the ever-changing market situation, you never know how your home value will be affected
So, why not start paying early to divide the burden? Balloon mortgage doesn’t bind you with conditions that you can only pay the principal amount after the initial period ends. You can start repayment before the principal payment phase and begin to own home equity early.
As you approach the period of paying back the entire mortgage loan, your heartbeats may get faster. That is more likely if you don’t have enough finances or income stream.
In such a situation, a balloon mortgage may allow you to defer the payment in certain situations.
Remember, this is up to your lender, and the deferral clause needs to be mentioned in your mortgage contract. So, before signing that all-important document, ensure the deferral clause is there.
That was the positive side of a balloon mortgage, hope you liked that. But as we are talking about the balloon mortgage pros and cons, here are some potential downsides you can face.
You are happily paying off just the interest rate of your mortgage loan. Suddenly, you have to deal with such a high lump sum amount. That can be a daunting experience for which you will have to start preparing and saving well in advance.
We have mentioned earlier how you can sell your property for a profit before the principle payment period starts. You would be planning to use the proceeds to pay for the lump sum amount. That’s a good plan, but the unpredictable market situation may have other ideas.
If your property depreciates over time, it can be hard to earn profit and pay for the remaining home equity.
Suppose you have bought a house worth $200,000. When selling, the property value decreases to $150,000. That can destroy your idea of leaving your home without paying the principal amount.
One of the major reasons for the great deprecation was that many people took massive balloon mortgage loans and sold their houses without paying the principal. That’s why most lenders don’t offer the balloon mortgage.
As people have understood balloon mortgage pros and cons, many are using it in the wrong way.
You think you have a stable job and expect your income or high returns from an investment to pay the lump sum amount. But when the time comes to pay, life may throw challenges.
That may make it harder to pay off the mortgage loan and secure 100% home equity.
While reading all this, you might be thinking, “What’s the big deal? I will just find another lender.”
That’s a good idea, but you may be missing a key factor in your loan approval. Without paying the lump sum amount, you are not buying home equity. So, the lender is unlikely to approve your loan at favorable terms.
Knowing the balloon mortgage pros and cons helps you secure a high amount at favorable rates. If you have decided that, “Yes, the balloon mortgage will be the financing method for my next home,” you now need a reliable realtor to find the right home.
At HAR, we are a Texas-based real estate on a mission to secure quality houses and smoothen the home-buying process for our clients. We would love to have you in our clientele.
A balloon mortgage is a type of home loan that requires minimal to no monthly payments, with only interest payments during an initial phase. The remaining loan amount is paid in a lump sum at the end of the loan term.
Unlike interest-only mortgages, where only interest is paid initially, in a balloon mortgage, you don't have to make monthly principal payments. The entire remaining loan balance is paid as a lump sum.
Advantages of balloon mortgages include reduced initial monthly payments, lower interest rates with fixed-rate options, the flexibility of short-term ownership for those planning to move, early equity ownership, and the potential for deferred payments in certain situations.
Disadvantages of balloon mortgages include the challenge of making a significant lump sum payment at the end of the term, the risk of property depreciation affecting the ability to cover the lump sum, difficulty in finding lenders willing to offer balloon mortgages, and the potential impact of uncertain life events on repayment. Refinancing can also be challenging without having built home equity through lump sum payments.
Prospective borrowers considering a balloon mortgage should carefully evaluate their financial situation and ability to make the lump sum payment at the end of the term. They should also consider property market conditions and whether they can find a lender willing to offer a balloon mortgage. Additionally, having a plan to address life events that may impact repayment is advisable.
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