Balloon Mortgages

In this day and age, it's fairly safe to say that almost any type of mortgage you may be in need of can be found. Homeowners today are not limited like their parents and grandparents were. The choices that exist are a result of the current market and real estate investments. For example, you've probably heard of one special type of mortgage – known as the balloon mortgage. Analogous to a balloon, this mortgage's final payment 'blows up' to a much larger-than-normal amount due to pay off the remaining balance of the note all at once.

The borrower choosing a balloon mortgage will have a lower interest rate on their loan for a specific period of time. In that respect, a balloon mortgage is akin to an adjustable-rate mortgage. The interest rate can also be guaranteed within a certain time frame. After that period, however, the rate will change. The lower-rate term can typically range from three- to ten years. During that time, the borrower enjoys the benefit that a fixed-rate mortgage owner enjoys. The payment is the same each month, making financial budgeting that much easier.

Unlike both the fixed-rate and adjustable-rate mortgages, however, the balloon mortgage requires a lump sum payout at the end of the amortized payment period. This may seem insane to many people. Who in their right mind would want to be responsible for paying off the balance of their mortgage in one lump sum? Moreover, who could afford it? But the balloon mortgage can often represent a good option for real estate investors. The fixed-interest period allows them to take advantage of other investment opportunities and build capital. The lump sum payout (if they decide to make it) would mean that they now own the house free and clear; and when they rent the property, they create a substantial positive cash flow for themselves. A homeowner with a balloon mortgage, on the other hand, can convert it to another form through refinancing before the fixed period ends. Or, they can choose to sell the home.

When considered and planned for carefully, a balloon mortgage can have advantages. For example, if the owner is not planning to live in the house for an extended period of time, this option will allow him to pay a fixed amount at a low rate of interest for the time that he or she plans to stay there. Then, when the owner sells the property, the lump sum amount can be paid off with (hopefully) money left to spare. During the time of ownership, home improvements and property appreciation can make the home more valuable, thus commanding a larger selling price.

On the other hand, the circumstances that existed when the balloon mortgage was chosen may change down the road. For instance, the homeowner might lose his or her job or have a big business deal fall through, or suffer any number of other potential setbacks. In such cases, refinancing is an option to keep the home out of foreclosure. However, refinancing usually involves closing costs and the possibility of a higher interest rate for the new mortgage loan. There could be big problems in the future if things don't work out as the borrower planned. Balloon mortgages should therefore be viewed and considered only with extreme caution and prudence.