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A balloon mortgage starts out like every other home loan. But then, something big happens. Here’s what you need to know.
What is a balloon mortgage?
A balloon mortgage is structured as a typical 30-year principal- and interest-payment loan for a set period of time, say five or 10 years. But at the end of that five- or 10-year term, a lump-sum payment, equal to the remaining balance of what you owe, is due. The benefit: a lower interest rate than with longer-term fixed rate mortgages.
So, you have a normal loan for a few years and then BAM! Pay up, you’re done.
Who would want such a thing?
When a balloon mortgage might be right for you
A balloon mortgage may be a good idea if:
You know — with a high degree of certainty — that you aren't going to still be in the property when the balloon payment comes due
You expect, again with a great deal of confidence, that you're going to receive a lump sum at least equal to the balloon payment that will come due. That could be something like a bonus or series of annual bonuses, an inheritance or the sale of another property.
You believe — there’s that confidence again — that you'll be able to refinance the loan before the end of the term
Balloon mortgages: pros and cons
You’ll probably get a significantly lower interest rate than with a typical fixed-rate loan — and that means a lower monthly payment
Any of the high-confidence scenarios mentioned above might not pan out
Interest rates might be higher when you need to refinance before the balloon payment is due
If property values go down, your options to refinance or sell might vanish
Something financially bad might happen, and you might not be able to pay the balloon or refinance
A balloon mortgage might be hard to find
Balloon mortgages were a thing back in the Wild West days of home loans just before the housing crash. Today, they can be hard to find.
An adjustable-rate mortgage might be a better solution for most short- to mid-term borrowers because ARMs have rate caps that limit how high the interest rate can rise. Even better: There’s no ticking time bomb of a looming balloon payment.
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