People often ask about balloon mortgages since they are becoming more popular recently. First of all, what is a balloon mortgage?
A balloon mortgage is a type of loan with a lump sum “balloon payment” that is charged at the end of the selected term. Generally, they have lower interest rates, lower monthly payments, and a shorter term. Often, the monthly payments are set to cover the interest that accrued within the time since the previous payment. When the term ends, buyers are billed with a very large remaining balance that is either refinanced or paid.
Balloon mortgages are commonly known as being risky – some lenders don’t offer them because the buyer is left with such a large balance and it’s hard to guarantee if it will get paid back. If a buyer can’t pay back the lump sum, then a refinance is necessary. Unfortunately, the interest rate is not locked, and it can fluctuate during the refinancing process. There are also usually fees associated with a refinance in addition to the remaining balance owed.
So, what are the benefits of a balloon mortgage? Set terms are typically between 5-10 years, so people planning to live in a house only for a short period of time can take advantage of a shorter amortization period. It’s also attractive to people who have a flexible income or a sizable year-end bonus. The lower interest rates and smaller monthly payments greatly benefit homeowners who aren’t paid traditionally and prefer to save their money and pay it all at once. Sometimes buyers opt for the balloon mortgage because they are expecting a higher income in the future and plan to refinance before the term is complete.
Pursuing a balloon mortgage is completely situational. There are pros and cons to every scenario, and it’s important to understand the risks involved before committing. While lower monthly payments are tempting, the counter to that is less equity built over time. Fluctuating housing markets also highly impact balloon mortgages and can put the buyer at risk if there is a crash.
If you have any questions about balloon mortgages, I’m happy to answer them or connect you with a trusted lender who can help. If you are looking to buy or sell a home before the end of the year, we should chat! I have been a full-time realtor for over 24 years working extensively with people moving to and from Pennsylvania and Maryland. Call me at 717-253-3259 (cellphone) or visit my website at www.karentavenner.com.