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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