The balloon mortgage, also called the “non-amortizing mortgage” is a type of fixed rate loan program that does not entail the complete repayment of interest and principal costs. It is similar to a fixed rate loan program, especially the 30-year term.
Balloon mortgages are short-term loans wherein the periodic payments (usually in smaller amounts) are made until the term’s completion. At this period, the loan’s balance can be suitable as a solo “lump sum payment”. The repayment term is longer compared to the mortgage’s actual period; because of this, the debtor has to pay off or refinance his or her outstanding balance during the end term of the mortgage. As compared to the usual fixed rate loan, the balloon mortgage has less debt repayment.
The balloon mortgage is called as such because after the end term of the mortgage (generally from 5 to 7 years), it forms a “balloon” or a single payment amount. In other words, the balloon mortgage allows the borrower’s payments to inflate following the end of the loan’s term.
There are two kinds of balloon mortgages. The first type is an ‘Interest-Only Loan’. It has payments that only enfold the owed interest. The second type is a ‘partially amortizing mortgage’ – also called the ‘Rollover Mortgage’. This type of mortgage is short-term. Through this balloon mortgage, borrowers are typically obliged to refinance during the end of the approved term. The period is generally from 3 to 5 years.
Some of the advantages of the balloon mortgage include:
1. A balloon mortgage generally has a lower interest rate. Because of this a borrower may be eligible to get an even larger loan.
2. A balloon mortgage is a great choice for a borrower who plans to relocate or sell his or her house in the future.
3. The balloon mortgage’s payments and interest rates are known to be stable and predictable all throughout the loan’s term. This in turn promotes better budgeting on the part of the borrower.
4. When compared to the adjustable rate mortgage (ARM), the balloon mortgage is simpler. For instance, in a 7-year balloon mortgage, a borrower can pay it off through refinancing. In a 7-year ARM the borrower is subject to rate changes according to the approved contract rules. Most borrowers find this system hard to understand.
5. When compared to the adjustable rate mortgage (ARM), the balloon mortgage has lower interest rates. As of the last quarter of 2006, the interest rate difference between the 7-year balloon mortgage and the 7-year ARM was approximately .125% to .25% respectfully.
The Balloon Mortgage’s Features
1. The option to refinance is not automatic. Borrowers must apply to refinance personally through a written application.
2. Under the balloon mortgage, the borrower usually must have his or her house as his or her principal residence. In some situations, lenders also accept second home properties.
3. Typically, a borrower does not have to re-qualify when he or she is refinancing during the end of the mortgage’s 7-year period. However, this can only be applied if the new rate is not higher than 5% when compared to the mortgage’s first interest rate.
Precautions to Take Before Taking Up a Balloon Mortgage
1. Most financial experts in the loan and mortgage industry see the balloon mortgage as a short-term answer to financial problems.
2. Borrowers who are not sure about their jobs or those individuals who have no stable employment, such as freelancers and contractual workers, should not take up the balloon mortgage because its interest rate might increase at an unpredictable rate.
3. Borrowers are cautioned that if the interest rate increases to more than 5% higher than the balloon rate, he or she might be obliged to ‘re-qualify’. When this happens, the borrower’s home might be appraised again.
4. The best scenario in selecting the balloon mortgage is if the borrower is almost sure that he or she could pay off the house before the balloon term ends. If this is not the case, borrowers should stay away from balloon mortgages because they entail higher risks.
Leave a Comment