How Balloon Mortgages work:
We all know that the most important part of finding the right loan is figuring out when, where, and how the interest is going to affect your re-payment schedule. A balloon mortgage is designed to allocate the bulk of your monthly payments specifically toward the interest on the loan rather than the principal.
This method of payment has two advantageous effects: it eliminates your third-party interest payments in a shorter period of time—usually between 5 and 7 years—and it provides you with comparatively lower monthly payments than Adjustable Mortgage Rates (AMR’s) and Fixed Mortgage Rates (FMR’s).
Where Does the Term “Balloon” Come From?
The term “balloon” became equated with re-set mortgages because, after the interest is paid off during the initial 5-7 year plan, the leftover principal value becomes the final payment as due in one lump sum. This final payment will be no secret between you and your lender, and clearing the “balloon” balance at the end of a re-set mortgage plan is most commonly achieved by re-financing the home under new terms.
How Do I Know if a Balloon Mortgage is Right for Me?
Like any payment plan, a re-set mortgage has more advantages for certain kinds of potential home-owners. For instance, the final balloon payment is usually acquired through re-financing—or “re-setting”—under a new plan, or through obtaining the principal value of the home itself by placing it on the market for sale. This means that if you are interested in a shorter-term home-owning commitment, a balloon mortgage would work more toward your benefit by offering the lower initial monthly payments of a 30 year FRM with the option to sell or refinance after a fraction of the time.
What are some specific examples of when a Balloon Mortgage would be an appropriate choice?
- If you are in the Military—or other such career where relocation every few years is required—a balloon plan offers the option to capitalize on the home’s value at the end of the term.
- If you are planning on starting a family, a balloon mortgage would offer you the option of timing the purchase of a new home with roughly the same time-frame it will take your family to outgrow the first one.
- You may be interested in “flipping” a home. A balloon mortgage will offer you affordable payments during the remodeling phase, a specific period of time in which to complete construction, and possible extra time you may want to use renting the home temporarily, apply finishing touches, and planning its sale to secure profit.
As you can see, there are definitely many scenarios in which a Balloon Mortgage would be to your favor. If you think that this option sounds best for you, talk with your lender about why and how you can make the best financial decision for your family.