If you are in the housing market, choosing what home to buy is not your only big decision. You will also have to think carefully about the type of mortgage you will take out. While most people think of the two most popular types of mortgages, fixed rate and adjustable, there are other types of mortgages available, one of them being a balloon mortgage. While not for everyone, there are several benefits of a balloon mortgage.
What Is a Balloon Mortgage?
A balloon mortgage is much shorter in duration than other mortgages, usually five to seven years. At the end of that term, the home owner must either pay the principal off, refinance the home, or sell it.
The Benefits of a Balloon Mortgage
Lower Interest Rates–Typically, a balloon mortgage may give the home buyer lower mortgage rates than an adjustable rate or fixed rate mortgage. Balloon mortgages can even offer better interest rates than adjustable rate mortgages (ARMs). Because the duration of the loan is so short, the lender is taking less risk and rewards the borrower with lower interest rates.
Smaller Mortgage Payments—If you are looking for lower monthly mortgage payments, the balloon mortgage also comes out front. The combination of lower interest rates and smaller monthly mortgage payments can be very attractive to home buyers, especially if you plan to sell the house before the balloon payment comes due. This type of loan can also be beneficial to home flippers who seek to renovate the home and sell it quickly.
Larger Mortgage Amount—Borrowers may qualify for a larger mortgage amount when seeking a balloon mortgage than they would with other types of mortgages, which can be an advantage if they anticipate a significant increase in income or windfall.
Ability to Refinance Easily—Some balloon mortgages allow you to refinance the mortgage when the balloon payment is due. This type of loan does not require a new home appraisal, which can be beneficial. However, you will refinance at the current interest rate, which may be higher than when you took out your initial balloon mortgage.
Ability to Take Advantage of a Dropping Interest Rate—If mortgage interest rates are dropping but you want to get into the market now, a balloon mortgage may be the way to go. When the balloon payment is due, you can refinance at a much lower interest rate.
While a balloon mortgage has some definite advantages, taking out this type of mortgage is risky. You may not be able to make the principal payment when it is due or you may not be able to refinance. If you can refinance, you may have to do so at a much higher interest rate, which will increase your monthly payment, sometime drastically. Many lenders will not even offer this type of mortgage. If you want to be safe, only take out a balloon mortgage if you will be in the house for less than the duration of the mortgage loan or if you are renovating the home and selling it quickly.
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