How Does A Balloon Mortgage Work?
Joseph Kenny
Finally being able to buy your house because you got the
mortgage you wanted is an exciting thing. Many mortgage
possibilities are available, but a balloon mortgage may be the
thing that you need to get moved in. Here are some things you
need to know about balloon mortgages that will enable you to
decide if this type of mortgage can help you.
A balloon mortgage is taken out for a 30-year period, like an
ordinary mortgage, but paid back much sooner. These are often
paid back in 5 or 7 years, but recently a 15-year option has
become rather popular. At the end of this period of time, the
mortgage becomes fully due - it must be paid off. Since most
people cannot pay it off because the balance is still quite
large, there is a guaranteed option of refinancing - at the
market rate at the time.
This makes a balloon mortgage in some ways both like a fixed
rate mortgage and an adjustable rate mortgage (ARM). It is like
a fixed rate mortgage in that it has a fixed payment over a
certain period of time. On the other hand, a balloon mortgage
is like an ARM because the guaranteed level of interest goes to
an unknown rate - to whatever the interest rate is when you
refinance.
The monthly payment for a balloon mortgage is like the payment
for a fixed rate mortgage because it is based on the whole
period of the loan - for 30 years. All balloon mortgages are
calculated on a 30-year time frame. The difference being that
the full payment is due earlier.
The advantage of getting a balloon mortgage is that it enables
you to get lower than traditional mortgage costs. Your payment
will usually be a little less than if you had a regular
mortgage. This also means two things, though. First, it means
that you are not paying much more than interest in the brief
time span of the loan; and this also means that you really are
not building up much equity on the home during that time.
At the end of the specified time period, whether 5, 7, 15
years, or some other arrangement, you must pay off the balance
of the mortgage. A balloon mortgage will be of more value to
you if you are intending to sell the house before the balloon
payment is due, or, plan to refinance. Refinancing, of course,
means that you are forced to take a risk on whatever the new
interest rates are at the time – could be good or bad. There
will be, in the initial contract, terms under which such a
contract can be refinanced. This may be, however,
non-negotiable. Which means, simply, that you are better off
refinancing through another lending agency - in most cases.
A balloon mortgage works well with someone who knows that they
may not be staying in an area for a long period of time.
Another possibility is if you know you can take the balance of
your lower payment, reinvest it in higher interest yielding
products, and then pay off the balloon mortgage at the end of
the term.
About The Author: Joe Kenny writes for the UK personal finance
sites
http://www.ukpersonalloanstore.co.uk and also
http://www.cardguide.co.uk
See Also:
Index of All
Info on Home: Loans, Insurance & Selling
Search our site for any Home, Lawn or Garden Info
