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Balloon Mortgage

When most people hear the word balloon mortgage, they get a funny picture in their head about a mortgage being raised up in the air by a big hot air balloon.  While this is not the case, why is a mortgage described this way and what exactly is a balloon mortgage?  Let's go over the particulars of what exactly a balloon mortgage is, how they work, and what applications they would work for.  

A balloon mortgage is used to describe a mortgage that has an introductory rate, but then comes full circle in a few years to be paid off.  The reason it is called a balloon mortgage is because it's repayment schedule follows the shape of a balloon.  When you initially get the loan, the payments are low for a period of time, but just like the shape of balloon, the payments do come back over a period of time to require the loan to be paid in full.  Most balloon mortgages have repayment terms of 3, 5, or even 10 years.  During these time periods, the monthly payment is very low, but once the period is over, repayment of the loan in full is required.   

So why would anyone use this type of mortgage program?  A balloon mortgage has its place with people that need to liquidate assets or who will be owning a property for a very short period of time.  This type of loan allows a buyer to pay a low amount of interest on the loan because the lender knows they will be receiving cash in full on the mortgage in a short period of time.  This appeals to investors who don't want to amortize a mortgage over 30 years and pay extra interest.  While this loan is great from an investment standpoint, it can wreak havoc on a normal home buyer.  Sadly, many people got this type of mortgage when the housing market was good, but now the mortgages are coming due to be paid in full. 

A person that got one of these mortgage, but can't pay it in full should definitely look into mortgage refinancing options. This will allow them to get a mortgage refinance which will convert the balloon mortgage to a 30 yr fixed mortgage. This can lower monthly payments and delay the payment in full for several years to a more manageable timetable. If you have bad credit, you can get a bad credit mortgage refinance that can convert the mortgage through legislation that has been passed. This type of mortgage is a great tool when used correctly, but when abused, it can definitely create a large burden on a borrower.  

 

 

  10 Steps to Home Ownership:

Step 1: Are You Ready?

Step 2: Hire a Realtor

Step 3: Get Loan Pre-approval

Step 4: Search for Homes

Step 5: Choose a Home

Step 6: Obtain a mortgage

Step 7: Make an Offer

Step 8: Insure Your Home

Step 9: Close the Deal

Step 10: Avoid Foreclosure

 

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