Financing a home can be easier to pull off when there are more options available to you. Some people hope to buy a home now, when their income is not as high as they’d like it to be, rather than wait 5 to 10 years for their situation to stabilize. This is a concern that can be addressed by taking out a balloon mortgage.
A balloon mortgage is a financing option that gives home buyers an easier time within the first 10 to 15 years and then caps that period off with a request for the balance of the mortgage paid immediately. This “easier time” may be realized with a lower monthly payment, lower interest rate, or both.
For example, with a balloon mortgage you might pay $750 a month for 10 years (a grand total of $90,000) and then have a balance of $60,000 that will be due immediately. While such a ’small’ balance may be workable for some, for others it may not. Additionally, those who purchased more expensive homes will also have a much larger balance to pay off. The person in the above example may have chosen a balloon mortgage to reduce their payment by $250 or $500 a month or they may have gotten a point shaved off of their interest rate.
The problem with this type of mortgage is that sometimes that ‘lenient’ 10 to 15 year period can sometimes creep up on homeowners quicker than they think. They haven’t made a large dent in the amount that they owe and their financial situation has not improved enough to allow them to pay off the rest of the mortgage all at once. The good news is that you can refinance this remaining amount, assuming that you still qualify for a loan.
All in all, a balloon mortgage is great for those who want an alternative to a traditional fixed rate mortgage and who also don’t want the interest rate fluctuations that come with an adjustable rate mortgage (ARM), the other most popular alternative to a traditional fixed rate mortgage.
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