Find Out What A Balloon Payment Mortgage Is
Lorna Mclaren
The other term for a balloon payment mortgage is a partially
amortized loan. Balloon payment mortgage is when your liability
or obligation is only partially amortized, leaving the rest to be
paid upon the completion of the term. Because the initial
interest rates and monthly payments are lower, a balloon payment
mortgage is paid off with one large payment at the end of the
loan term.
Balloon payment mortgages are called such because borrowers who
are on this type of loan are usually set up for a “balloon”
payment at the end of their loan term. In most other loans,
monthly payments do not only pay off the interest but also chip
away at the principal amount – the original amount owed. Thus at
the end of each loan term where balloon payment mortgage is
applied, no money is owed.
With balloon payment mortgages however, the monthly payment only
comprises of interest or a combination of interest plus a small
amount for the principal. No matter the case, when the balloon
payment mortgage term expires, the balance is due in full.
Most second mortgages are commonly balloon payment mortgages. For
instance, your balloon payment mortgage is $20,000 with a monthly
interest-only payment set up for ten years. When your balloon
payment mortgage term ends, you still have to pay for the $20,000
principal amount.
There are a couple of accepted institutional loan products that
have balloon payment mortgages. One of these balloon payment
mortgage products is the 30-year loan that has to be paid off in
five or seven years.
Usually, the interest rate of the 30-year balloon payment
mortgage is lower than a normal 30-year fixed rate mortgage with
due date of 30 years. Monthly payments of balloon payment
mortgage are still amortized based on the 30-year term. But at
the end of five or seven years, a large amount of the balloon
payment mortgage is due.
To explain further on this, let’s say you have a balloon payment
mortgage with an interest rate of 7.5%. After seven years, an
approximate 92% of the original balloon payment mortgage amount
is due. For example, the amount of the balloon payment mortgage
is $200,000. The interest rate for this balloon payment mortgage
is 7.5%. After seven years, the total amount of money you owe to
the balloon payment mortgage lender is $184,000, provided that
you haven’t sold the property yet or refinanced.
A tip for home borrowers is that when you do take on a balloon
payment mortgage makes sure that the due date is not too soon.
With balloon payment mortgages, if you can’t pay the lender the
amount on the due date, you might have to foreclose and lose the
property.
Some lenders offer extensions for their 30-years-due-in-7 balloon
payment mortgages. Lenders of this type of loan may extend your
balloon payment mortgage for another 23 years but with a new
interest rate. These balloon payment lenders base their new
interest rates on a conversion formula. In this case, you might
have to re-qualify for the balloon payment mortgage should the
new interest rate on the mortgage being converted is
significantly higher than the old rate.
Find out more about financial issues at http://www.123-debt-
consolidation-loans.com and start gathering as much information
as possible before you make your decision.
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