A balloon mortgage is a type of mortgage in which you make normal monthly payments for a set period, usually five to seven year, and then have to make a large payment to pay off the remaining balance. The large payment is the “balloon” part of your loan. Depending on the size of the mortgage, that payment can be thousands of dollars.
Advantages of a Balloon Loan
Balloon mortgages come with lower interest rates than adjustable-rate and fixed-rate mortgages, which can make them a cheaper loan for certain customers. This option works well for people who expect to get a raise at work or who plan on having a larger paycheck in the upcoming years. This also works for a person who gets a large bonus but has a moderate paycheck.
Balloon mortgages also work for people who plan to move in a short period of time. If someone only plans on staying in a home for three years, they can take out a five-year balloon mortgage and then sell their home before the massive balloon payment.
Disadvantages of a Balloon Mortgage
Balloon mortgages are very risky. Most homebuyers who don’t want to sell their homes before the balloon payment is due want to refinance their loan into a fixed-rate or adjustable-rate mortgage. If you can’t pay off your balloon payment, you should refinance your loan before you have to pay.
If you are unable to refinance, are not going to be moving, and can’t afford your balloon payment, you don’t have many options. In this scenario, it’s best to call your lender as soon as you realize you can’t afford your payment. Your lender might have some options available to help you. They can extend your existing loan another five years before you have to pay the balloon payment. This gives you time to pay off some more of what you owe, and hopefully build equity in your home, which might help you refinance your loan. Additionally, your lender may also offer to refinance your loan on its own. If your lender isn’t willing to negotiate, you might be facing foreclosure.