Balloon mortgages are identified as a mortgage that doesn’t amortize but rather is paid off in small payments throughout the loan, leaving one large or balloon payment due at the end of the loan or when the loan matures. Balloon mortgages are commonly seen with commercial property but they can be used with residential loans as well. They are frequently desired by many as they allow for homeowners to maintain low payments for a certain period of time. Though each balloon mortgage can be different, most become mature after five to seven years. As the mortgage matures, the lender requires the full payment of the principal balance. Many mortgagees choose to refinance the home or convert the balloon mortgage to a fixed loan.
Those purchasing a home or commercial real estate will need to compare different types of mortgages and choose the best type of mortgage for their individual situation. As balloon mortgages are set for shorter terms many feel that they are an easier type of mortgage to select. Since the full amount is due at loan maturity, their interest rates are often lower than what you’d see with an adjustable rate mortgage as well. Those rates change, however, for those who choose a balloon mortgage with a term longer than seven years. Another issue often seen with balloon mortgages pertains to refinancing. The large amount due upon maturity, however, can cause complications for those who’ve missed payments. Just missing one payment can result in a lender deciding not to refinance your loan. Balloon mortgages are a good choice for those who plan to live in a home for a short period of time, then expect to sell the home and make a profit. This enables the homeowner to have easy access to the finances needed to pay off the mortgage.
When determining the best mortgage for your situation, begin by deciding how long you plan to stay in your home. Those who expect to stay in a home for the remainder of their life may find that a fixed rate mortgage is the best option, while those who expect to move or sell the home may find that an adjustable rate mortgage or balloon is the best choice. It’s also important for homeowners to determine how much financial risk they are willing to take when they shop for a new home or business. With balloon mortgages and ARMs you must prepare yourself for the inevitable reality of eventually paying higher rates and fees. Determine beforehand how much you can afford to take on in higher payments to ensure that you are not taking on a risk that will push you into debt and possibly cause you to default on your loan. You must know what the highest payment would be with an ARM and be absolutely certain you can make that payment before taking on an ARM mortgage.
Those who wish to have a mortgage that is without surprise or change and intend on staying within the home for a long period of time may find that a fixed rate mortgage is the best choice. Those who plan on selling their home at a later date often find that a fixed rate mortgage has higher interest rates, therefore is not the best choice. As balloon mortgages have lower rates and fees then ARMs, they are a suitable choice when it is 100% certain you will sell the home. Fixed rate mortgages remain the same throughout the entire life of the loan and you’ll never need to worry that market conditions will impact your rates. With a fixed rate mortgage you can be absolutely certain that your interest rates will never change. On the other side, however, should the market decline and rates fall, those with fixed rate mortgages will not enjoy the benefits and will remain paying a higher mortgage.
Before determining whether balloon mortgages, fixed rate mortgages or adjustable rate mortgages are the best loan type for your situation determine how long you plan to stay in your home and what type of payments you can afford.