Balloon mortgage breakdown: Risks and benefits explained

When a would-be homeowner begins the process buying a house, there are several things to consider when choosing the right loan package. A would-be buyer must consider how long they intend to be in their house, the amount of money they are definitely able to pay monthly, and the health of their credit score. Alternatives to the traditional 30-year mortgage offer consumers many choices in how they will finance their house. A Balloon Mortgage is one such option, and should be carefully considered when a homeowner is selecting a finance method.

A Balloon Mortgage is a unique type of loan. It has a typical mortgage term of five to seven years. Homeowners are expected to pay the remainder of the balloon mortgage at the end of this term. Homeowners may choose to pay the amount left owed in a lump sum, refinance to a traditional mortgage, or sell the home. This loan option is effective for individual’s who do not have a lot of income available to being the home buying process, but who expect a substantial increase in expendable income within the five to seven year timeframe of a balloon mortgage.

Payments on a balloon mortgage are typically less than payments on a traditional 30-year mortgage. Though the term on a balloon mortgage will range from five to seven years, the payments will be based on a thirty year term. This means, a balloon mortgage owner will pay between five and seven years worth of a thirty-year loan and then be expected to pay the remaining years’ worth of payments at the end of the mortgage term. The interest rate available on balloon mortgages is typically less than that available for standard mortgages. Balloon mortgages are also easier to qualify for than traditional mortgages.

Balloon mortgages are good options for individuals who only plan to own their home for five to seven years. Individuals with little credit or who have never owned a home may select this option because it is easier to qualify for than a standard mortgage. There are some risks to keep in mind before an individual opts to finance via balloon mortgage. At the end of the term of the mortgage, the homeowner will be expected to pay off the loan. The homeowner is not guaranteed an opportunity to refinance when the loan is initially applied for, and may not be offered such an opportunity at the completion of the term. If the homeowner decides to convert the loan to a traditional mortgage or to refinance, they must do so at current 30-year rates. These rates may not be favorable to the homeowner, and my result in increased monthly payments and a greater cost overall. A balloon mortgage is a quality alternative to the traditional 30-year mortgage, and offers first-time homebuyers an opportunity to establish their credit worthiness.