Balloon Mortgage
The balloon mortgage, also called as the "non-amortizing mortgage" is a type of a fixed rate loan program that does not entail the complete repayment of the interest and principal costs. It is similar to the fixed rate loan program especially the 30-year term.Balloon mortgages are short-term loans wherein the periodic payments (usually in smaller amounts) are done until the term"s completion. At this period, the loan balance can be suitable as a solo "lump sum payment". The paying-off term is longer as 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 a lesser debt repayment.
The balloon mortgage is called as such because after the end term of the mortgage (generally from 5 to 7 year), it forms a "balloon" or a single amount of payment. In other words, the balloon mortgage lets 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 the "Interest-Only Loan". It has payments that only enfold the owed interest. The second type is the "partially amortizing mortgage". It is also called as the "Rollover Mortgage". This kind is short-term. Through this balloon mortgage type, 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 most common advantages of the balloon mortgage include the following:
1. Generally, a balloon mortgage has a lesser interest rate. Because of this, it enables a borrower to be eligible to make an even larger loan.
2. A balloon mortgage is a great choice especially 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 contrast to the 7-year ARM, the borrower is subjected 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 from .125% to .25%.
The Balloon Mortgage’s Features
1. Its option to refinance is not automatic. Borrowers must apply to it 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.
Guidelines and Cautions 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 unprecedented pace.
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 away from balloon mortgage because it entails higher risks.
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