Homebuyers who are looking for short-term financing loans may consider taking a balloon mortgage.
It is an excellent option if you what a mortgage with a term that shorter than 15 years. A balloon mortgage usually has a 5- to a 7-year term with a payment that is similar to that of a 30-year term mortgage. This means that if you can handle the loan well, you’ll be mortgage-free much quicker.
Let’s understand how a balloon mortgage works and tackle its pros and cons. This will help you decide if this financing works for you.
How does a Balloon Mortgage Work?
It a type of short-term home financing where a borrower has the option to make lower monthly mortgage payments for a specific period of time. Then, the remaining balance must be paid off within a relatively short period toward the end of the loan term.
A balloon mortgage can be in a form of a partially amortizing mortgage or interest-only loan.
The biggest advantage balloon mortgages offer is it often carries a lower interest rate than most conventional loans. This allows the borrower to ramp up his savings which will come in handy by the end of the loan term. With a balloon mortgage, you may also get a larger loan amount compared to a fixed-rate or an adjustable-rate loan.
If you’re not earning a lot of money now but are expecting to have a higher income in the near future, a balloon mortgage can be an excellent option for you to start on you homeownership plans. You no longer have to wait for that expected salary increase before you can buy the property.
A balloon mortgage can also be beneficial for homeowners who aren’t planning to stay on the property for long and are planning to make a profit by selling it. They may have the option of selling the home before the balloon payment becomes due.
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While a balloon mortgage has potential benefits, this loan may also have drawbacks. There are certain risks that consumers need to consider.
Toward the end of the loan term, the homebuyer will have to pay off the remaining mortgage balance, which can be a relatively large sum of money. The payment has to be repaid in a very short span of time.
This large one-time expense can be financially straining for a borrower who has failed to prepare for this balloon payment. If he/she fails to repay the outstanding balance completely, he/she is at risk of losing the property.
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Looking at balloon mortgage’s pros and con, you will be able to determine if this financing is what you really need. To help you make a sound decision, always consider discussing your homeownership plans with a trusted mortgage lender.
The bottom line comes to this — whichever financing you choose, you have to make sure that you can truly afford the mortgage. Make sure you shop for lenders. This allows you to find home financing loans that are affordable and have attractive terms.