Balloon Home Loans
A balloon loan will not be fully amortized at the end of the loan's term.
With a traditional fixed rate mortgage, if you make all the monthly payments
on time, then no money will be owed at the end of the term. With a balloon
loan, however, even with monthly payments made on time a large part
of the loan will still be outstanding. This large part that is still present will be
due in full at the end of the loan term.
For example let's say you borrow $50,000 at 6% amortized to 30 years, but due in 7
years. In this case you would make the monthly payment of a 30 year, 6% loan for
7 years. But at the end of 7 years the entire remaining balance would come due.
If the remaining balance on the balloon loan cannot be paid at the end of the term,
then the loan will have to be refinanced into a more long term stable loan.
Most balloon loans are refinanced before they reach the end of their term,
some lenders offer a guaranteed refinance or a new loan at the end of the balloon loan term. There
is usually a fee associated with both, and there are also generally
two basic things to watch out for:
- First of all you can't have missed a payment on your balloon loan. If you couldn't make the payments
on the balloon loan, they won't want to risk lending you money for a longer amount of
time. Of course this will depend on the lender, be sure to carefully read the loan document
to see if this is the case.
- The refinance or new loan will likely be at market rates, which means that if interest
rates have increased significantly, then you may end up with a much higher monthly
mortgage expense than before.
A balloon loan can be used responsibly however, to augment your down payment, reduce
interest charges, or take equity out of your current home to buy a new home. However you
should be aware that you will likely be refinancing your balloon loan, and will have to
do so at market rates.
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