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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