In this day and age, almost any type of mortgage that you need can be found. Homeowners are not limited like their parents and grandparents were. The choices that exist are a result of the market today and real estate investments.
One such type of mortgage is a balloon mortgage. You may have heard of people making “balloon payments”. Just like a hot air balloon, a balloon payment represents a larger than normal payment made to the financial institution that holds the note. These types of payments are made to stop foreclosures and other financial issues.
Along that same line is the balloon mortgage. Unlike the balloon payment, a balloon mortgage is a choice made by the homeowner when choosing the type of mortgage loan that will suit their needs. Here are a few of the particulars.
Someone choosing a balloon mortgage will have a lower interest rate on their loan for a specific time. In that respect, a balloon mortgage is like an adjustable rate mortgage. The interest rate can be guaranteed within a certain time frame. After that, the rate will change.
The lower interest rate period for a balloon mortgage can range from three to ten years. During that time, the owner enjoys the benefit that a fixed rate mortgage owner enjoys. The mortgage is the same each month which is easier for budgeting purposes.
Unlike either a fixed rate mortgage or an adjustable rate mortgage, the balloon mortgage requires a lump sum payout at the end of the fixed rate period. This may seem insane to most people. Who would want to be responsible for paying off the balance of the mortgage in one lump sum? Who could afford it?
However, this is a good option for real estate investors. The fixed period allows them to take advantage of other investment opportunities and build capital. The lump sum payout means that they own the house free and clear. When they rent the property, they create a positive cash flow back to themselves.
A homeowner can convert that mortgage to another form when the fixed period ends. They can choose a fixed or an adjustable rate mortgage. Many choose to sell the house.
There are advantages to a balloon mortgage. The owner may not be planning to live in the house for an extended period of time. As such, this option allows him to pay a fixed amount at a low interest rate for the time he plans to own it. If he sells, he can make the lump sum payment and still have money left over. During the time of ownership, home improvements and property appreciation can make the home more valuable and thus command a greater asking price when sold.
On the other hand, the circumstances that existed when the balloon mortgage was chosen can change years down the road. Someone may lose a job. A deal may fall through. Any number of things can happen. In that case, refinancing is an option to keep the home out of foreclosure. Refinancing does involve closing costs, and the possibility of a higher interest rate for a fixed mortgage or a variable interest rate for an adjustable mortgage.
Balloon mortgages are for certain instances and should not be chosen lightly. There could be big problems in the future if things don’t work out like you planned.