Friday, April 1, 2011

What You Need to Know About Balloon Mortgages

To overcome the major challenges, homeowners are provided with different opportunities to get different home loans. You have the option to choose a loan that is suitable for your capacity to pay. And one of the most preferable choices available for you is a balloon mortgages. It is important that you understand the features of this loan to determine if it is perfect for your situation.

What Is A Balloon Mortgage?

A balloon mortgage combines the features of 30 year (or 15 year) conventional fixed rate home loan at a lower start rate with a preset early payoff date. This preset payoff date is the date when the loan comes due and payable in one lump sum often called a balloon payment...hence the same balloon mortgage.

Because of this preset early payoff date, a balloon loan has a serious disadvantage that fully amortized mortgage do not carry. Of course, in the US the average home loan is retired via sale or refinance within 7 years anyway, so many advocates of balloon home loan are saying US borrowers are not taking advantage of the lower rate and are paying for time they never use.

When you get a balloon home loan, you will be given a fixed period to pay the loan at specific interest rate. So you will pay a fixed interest rate for the mortgage for either 5 years or 7 years. But after the fixed period, the mortgage becomes due.

If you want to stay in the home, this means you have to refinance or get a different home loan with interest rates subject to the current market rates. The balloon mortgage therefore forcing decision making sometime in the future where housing and interest rate markets are unknown.

The Benefits of Balloon Mortgages

When you get a balloon mortgage, you will enjoy lower monthly payments with lower interest rates for a specified period. This is one of the biggest advantages of this type of home loan. The fixed rates and the low monthly payments will give you the needed peace of mind. That is because your mortgage is predictable which will enable you to better manage your finances.

The typical fixed rate period for this type of loan is 5 to 7 years. During this time, you will know the exact amount that you have to set aside for the mortgage monthly. A balloon mortgage therefore will give you the opportunity to save some cash.

The Disadvantages of a Balloon Mortgage

A balloon home loan however has some major risks that should not be taken for granted. One of the biggest risks is the possibility of failing to get a suitable refinancing home loan when the mortgage becomes due. There are so many reasons why you might fail to secure a refinancing.

First of all, property values are very unstable. The value of your home could decline drastically which will prevent you from getting a new home loan. Another risk is the possibility of losing your job or your current income may not be sufficient to qualify for a refinancing or new mortgages. These are the risk factors that must be considered before you apply for a balloon type home loan.

A balloon mortgage is a suitable loan option for many homeowners. This type of mortgage however has certain risks that you must consider. If you are unable to get a new home loan when the balloon payment becomes due, and the housing market in you location will not allow you to sell for enough to cover the existing mortgage, there is a good possibility that you could lose your home by the lender forced to foreclose.

By: Rob K. Blake
Rob K. Blake, refinance expert and author, educates mortgage shoppers on finding local providers by state like West Virginia Mortgage Brokers and Lenders and provides reviews of national companies like Asset Acceptance Capital Corp.

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