A balloon mortgage is a mortgage with little to no monthly payment. However, the borrower is required to pay off the entire mortgage balance and the maturity (mortgage due date) date. If there is a monthly payment to make; it will be the interest charges.
Length of a balloon mortgage
Balloon mortgages are risky for both home buyers and their lenders. For this reason, they tend to have shorter-terms usually between 5 to 7 years. However, shorter terms such as 2 years also exist.
Benefits of balloon mortgages
By having the balloon mortgage you take advantage of lower interests rate and lower monthly payments. Usually, your monthly payment, if you have any will be a low-interest rate.
With a low-interest rate, you will have enough time to gather your payments without pressure.
Borrowers can also be qualified for a larger loan amount with balloon mortgage than fixed-rate mortgages.
Are you cash dry now and expecting larger revenues in the near future? A balloon mortgage could be your best choice.
Cons of having a balloon mortgage
It could be difficult to pay off the entire mortgage in one lump sum at the end of the life of your mortgage. Without other options, you could be in deep financial problems.
Some borrowers refinance their properties to pay off the mortgage lump sum. However, if the market changed dramatically during the lifetime of the mortgages, they may end up with expensive terms.
Small advise
Before choosing a balloon mortgage as your option, you must know your near future financial situations. This is due to the high risks associated with these mortgages.
Even if you are not paying a lot of money every month toward your mortgage, it is important that you start saving money for your lump sum payment. Doing so will save you from frustrations at the due date.
If you don’t have the lump sum needed to cover your mortgage payment, try to refinance your property.
