If you’re in the market for a home loan, it would be wise to consider all the options including a balloon mortgage. Most people think about the fixed rate and the adjustable rate mortgages. A balloon mortgage is similar to a fixed rate mortgage where at the end of the term the mortgage is paid off making monthly payments. On a balloon mortgage, you need to pay one big installment at the end to cover the remaining principal on the loan. Now, these kinds of loans come with better interest rates compared to fixed mortgages. There are certain drawbacks too though as the final payment can run into thousands of dollars.
Let’s examine if this is the right option for you.
Selling your home
If you plan on selling your home before the final payment is due because you want to make a big profit, this might be the way to go.
If your future income will rise
If you expect your future income to go up considerably in order for you to make a big final payout, then you could consider going in for a balloon mortgage.
Reset option
If your balloon mortgage comes with a reset option at the end of the term which allows you to reset your interest rates based on prevailing rates and reset your amortization schedule, then it will be a good option. However, if this option isn’t there and all else fails, you may need to refinance your loan or sell your home.
Let’s talk about some of the advantages of the balloon mortgage:
Low-interest rates
As these are short-term loans, the borrower gets a better rate of interest compared to the fixed and adjustable rate counterparts. The lender takes a lower risk and passes on these benefits to the borrower.
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Smaller mortgage payments
If you’re looking at lower interest rates and making lower mortgage payments each month, then this plan could be for you. People might also furnish the house well and flip it and make a profit before the final payment is due.
Refinancing option
If you have the option to refinance, it can be good and it doesn’t require a new home appraisal. You will be refinancing at the prevailing interest rates that might be higher than your previous rate.
Larger loan amount
Borrowers are eligible to borrow a larger loan amount with a balloon mortgage and if you expect a significant rise in your income or a windfall in the near future, this could be a great way to save money.
Let’s look at some of the drawbacks of this plan:
- If you need to refinance and your credit scores drop then you may find yourself in a tough spot financially. Furthermore, if your income drops then you might not be eligible for another mortgage loan.
- If you’re approved at the end of your term for refinance, interest rates can go up significantly and you’ll end up paying more.
- If the value of your home drops, you may struggle to refinance. If you need to sell your house and you can’t find a buyer, you may end up selling at a lesser price than what you owe.
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