Many prospective homeowners are willing to look at any mortgage instrument to achieve their dreams. As you search for the perfect mortgage, you might discover balloon payment mortgages.
But what exactly is a balloon mortgage, how does it work, and are there any downsides you need to worry about? Read on for detailed answers to each of these questions.
A balloon payment mortgage is a mortgage loan that has a larger-than-average final amount due on the last billing date.
Say you take out a balloon mortgage with a monthly payment of $1,200. At the end of the mortgage term, you pay off whatever is left of the loan in one lump payment known as a balloon payment. The final payment is larger because the loan’s amortization schedule is actually closer to that of a traditional mortgage, even though the loan term is only about five to ten years.
Balloon mortgages may also enable affordable early payments. These may be mostly interest payments, kicking the proverbial can down the road so that you pay a larger portion of the loan principal only toward the end of the agreed-upon term.
Balloon home mortgage loans were much more common before the 2008 financial crisis. Balloon loans have become much rarer in the years since, especially because it can be difficult for the average homebuyer to know whether they can really afford a balloon mortgage in the long run.
These mortgages are available to borrowers from many lenders. Loans with lower interest rates are available if you have a high credit score or if you make a high down payment. The interest rate can also impact whether this home loan is a wise choice for you compared to standard fixed-rate mortgages or adjustable-rate mortgages.
Many businesses now use balloon mortgages because they project they will make more profits in a few years’ time, but they need low, affordable monthly payments in the first months of their operations.
A balloon mortgage allows you to make affordable, easy-to-track mortgage payments throughout the life of the loan. They’re also ideal for those who want to avoid long 30-year mortgages, as they often last no more than 10 years.
You may find that a balloon mortgage allows you to afford a mortgage even with a low monthly income or in areas that you might not otherwise be able to afford at all. That’s because the monthly payments tend to be lower than fully amortized loans.
A balloon mortgage enables greater levels of homeownership across the country. This makes it an attractive tool for aspiring homeowners who have found themselves locked out of the real estate market for one reason or another.
That all said, balloon mortgages also have some fairly obvious downsides. First is the fact that you may have to make a much larger payment at the end of the loan term. This can be tens of thousands or even hundreds of thousands of dollars more than your normal monthly payments, especially when you consider interest rates.
If you haven’t saved up enough money for this final payment, or if you have a substantially lower income at the end of the loan term than you did in the beginning, you could have trouble making the final mortgage payment. In that case, you may have to work with your lender to refinance or extend the loan terms.
Naturally, many balloon mortgages also have higher-than-average interest rates. Therefore, you'll pay more for a balloon mortgage over the loan's lifespan than you would for a comparable standard mortgage with normal terms and payment conditions. The higher interest rate may go down depending on your loan balance — make a large lump sum payment at the start, and you’ll potentially avoid issues later.
In a broad sense, balloon mortgages can be deceptive. You might think you can afford a balloon payment mortgage, only to find out the truth toward the end of the loan term when your financial plan didn’t pan out or when you didn’t get a promotion.
For many homeowners who use balloon mortgages, the first five years are great. Then foreclosure looms because the payment amount is too large and the loan balance is too high to repay. Mortgage lenders then charge fees, and the remaining balance becomes even harder to pay off. Even worse, balloon loans usually don’t let you pay off the loan early without incurring prepayment penalties.
If the principal balance is too high for you, this type of mortgage isn’t likely to help you in the short-term.
However, you might have already signed on for a balloon mortgage. The deadline for the massive payment may be looming. You already know that you won’t have enough money to make that last payment for your mortgage loan — what can you do?
Turns out, you still have options. You can increase your cash flow or obtain another type of loan to pay the mortgage. Or, you can refinance, essentially obtaining a new loan and lengthening the period of time you have to pay.
You can also consider co-ownership with Balance. We'll take out an investment in your home equity, plus pay off your current mortgage in addition to the large balloon payment coming in the near future.
Instead of monthly mortgage payments, you make regular, low monthly payments to us to cover your exclusive occupancy of the property, property taxes, and insurance. All the while, you get to stay in your home, retain control over the property, and reserve the right to buy us out of the equity we invest in once your finances are a little more stable.
Balance offers an accessible way to get out of a balloon payment mortgage. It's also a good way to ensure you get to remain a homeowner and receive a lump sum to pay down debt or make home improvements.
While a balloon payment mortgage could be advantageous in some situations, it can also set you up for unexpected financial difficulties. If you aren’t 100% sure that you’ll be able to afford the final balloon payment for your mortgage, it’s never a good idea to take one out.
By maintaining your home equity, Balance believes we can help you rebuild your credit and financial health and create your path back to traditional homeownership.
Want to know more? Contact Balance today to discover your options!