Pros and Cons of Balloon Mortgages

by Alice Quinlan 12/01/2019

Image by Jojje from Shutterstock

Many people own homes through a mortgage agreement. Traditional mortgages are primarily fully amortized or gradually paid off with regular payments over the lifetime of the loan. Each payment contributes to both the principal and the interest.

A balloon mortgage is a short-term home loan with fixed-rate monthly payments that only take care of accrued interest on the loan for a set period. It also has a large “balloon” payment to cover the rest of the principal.

The payment plan is based mainly on a fifteen- or thirty-year mortgage, with small monthly payments until the due date for the balloon payment. These low regular payments partly cover the loan but require paying the remainder of the unpaid principal as a lump sum. Selling the house or refinancing the balloon loan before the payment is due is how most buyers approach this situation.

Key Issues with Balloon Mortgages

Lenders present a deadline by which the balloon payment is due (three- to seven-year period). The enormous amount is often more than borrowers can easily handle at once.

Paying only interest on a loan does not allow equity to build. Many homeowners use equity as a means to complete home improvements or other projects. Building equity also helps homeowners when it comes time to sell their home because a traditional mortgage reduces over time. 

Why People Opt for Balloon Loans

It is possible to refinance a balloon mortgage or sell the property before the balloon payment is due but it can be difficult to do so. A dry housing market, job loss, or low credit score are potential obstacles. Lay-offs and depressed home values can trap buyers in their balloon loans. Without the option to sell, refinance, or fulfill their balloon payments, borrowers may end up in foreclosure.

The One True Strategy

Traditional loans are generally safer than balloon mortgages. To keep housing costs at a minimum, use a balloon mortgage if you are sure you can exit before the balloon payment comes due. Otherwise, it is best to remain in the realm of traditional loans.

Review the pros and cons of taking a balloon loan before committing to it. Speak to your financial planner or realtor for professional guidance.

About the Author
Author

Alice Quinlan

Alice Quinlan is the one to get it DONE! Direct|Determined|Driven, Alice’s first step towards “getting it done” is to listen well and to understand what her buyers and sellers want and need in order to achieve their dream of owning their own home. She is a Certified Negotiation Expert! Alice is a Jersey Girl but has had the pleasure of calling Colorado home for many years. She has three children who have all attended school in Douglas County. In her free time, she loves attending concerts, baking, traveling and exploring all that Colorado has to offer. Alice and her husband have moved several times in the past 30 years making her an expert on relocating with a family. Alice knows what it takes to move a family across the country or across town. She is your relocation expert! Alice also knows what it takes to get into and out of the real estate market. Whether you’re looking to buy,sell or invest in real estate, Alice is committed to providing you with exceptional service. Alice’s goal is to guide you through your real estate transaction from start to finish while keeping you informed every step of the way. Give Alice a try and watch her exceed your expectations!