When you are looking at
different mortgages, you will hear the term “Balloon Mortgage” as one of the options for mortgages. You might
not be sure what a balloon mortgage is, but doing a little research and studying about different mortgage types,
you can discover what it is.
The reason this mortgage is called a balloon
mortgage is because the curve of the repayment schedule would look like a balloon if it were drawn out. There is
a low introductory rate and pretty soon in just a few years, the entire amount is due for payment. If you
notice, this is like a balloon, because the beginning is small and very quickly, it rounds into its fullness. A
balloon mortgage can be set to be repaid at different times, including 3, 5, and 10 years, but the full amount
is due at the end of the term of the loan.
Someone who might want to use a balloon mortgage
would be someone who wants the investment return and is only planning on living in the home for a short amount
of time before reselling it. They would have the small payment for the time they owned the house, and then they
could sell and pay it off with the sale of the house. The reason that lenders are willing to do this type of
loan is because they know they will get the payment in full, eventually, so they are happy to start it out with
a small rate.
One thing to be careful about when thinking about
a balloon mortgage is that if you plan to live in your home for a long time, you may not be able to afford the
payments when they round out and become very large. This could put you in a very bad situation, causing you to
have bad credit. If you find yourself in this situation and your balloon mortgage is almost due, you may want to
look into mortgage refinancing so that you will not have to come up with the entire amount in a short period of
time. If you can do a mortgage refinance, this could save your home so that you don’t lose it. All in all, a
balloon mortgage is something that grows quickly and if you are not certain you will be able to pay it off when
it grows and rounds out, it could become a huge burden, so be sure you understand exactly how it will all work
out for you so that you don’t end up in a tough situation.