The Pros and Cons of Balloon Mortgages

Balloon mortgages can be a good financing scheme for borrowers who want low and fixed interest rates on their loans. This type of mortgage has a shorter term compared to other loans, typically lasting for only 5 to 7 years. However, availing of this type of mortgage may expose the borrower to a huge remaining balance at the end of the loan term and that amount must be paid in full. A balloon payment mortgage is ideal for home buyers who are expecting to receive a big sum of money or a higher income within the next few years. Also, individuals who relocate often and do not intend to stay in their newly acquired homes for the long term can benefit from this type of mortgage. Here are the main benefits and risks associated with this home financing method.

Pros of Balloon Mortgages

1. Affordable Initial Cash Outlay

One of the things that make this home loan attractive is the low down payment. This allows a significant number of home loan applicants to become eligible for this type of mortgage. So, if you are cash-strapped at present, but you are expecting to get a huge lump sum within 5 to 7 years, this alternative home financing scheme is ideal for you.

2. Lower Interest Rate

The interest rates applicable to balloon loans are comparable to that of a regular fixed-rate mortgage, notwithstanding the fact that balloon loans have shorter payment terms. Since a balloon home mortgage matures within 5 to 7 years, many lenders consider it as low risk.

3. Remaining Balances can Be Refinanced

In the event that borrowers are unable to fully pay their remaining balances at the end of the mortgage term, they can reapply for a resetting or refinancing of such loan balances. However, the rates that the lenders will use on the refinanced mortgage will be the prevailing market interest rates. This means that the borrower could face a higher rate compared to the one used on the original balloon loan.

Cons of Balloon Mortgages

1. Large Payment Due upon Maturity

The main disadvantage of a balloon loan is the large lump sum payment due upon maturity. If you decide to get this type of mortgage, you need to ensure that by the end of the term, you have access to a big source of fund because the lump sum payment can be very expensive. A typical family with an average income may not be able to raise enough funds within 5 to 7 years to cover the balloon payment.

2. Higher Risk of Foreclosure


There is always that chance of foreclosure in any type of home loan, but the risk of losing your home can be higher with a balloon mortgage. Apart from the big lump sum amount that you need to pay on maturity date, your failure to qualify for loan refinancing can increase the risk of foreclosure and make things more difficult. During the 2008 mortgage crisis, a significant number of people with balloon mortgages faced foreclosures because they were unable to sell their homes on time and pay for the remaining balances of their loans or they simply were unable to get refinancing.

 

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