When exploring the real estate market, what type of house you’re buying is just one of numerous big decisions you must make. Another important consideration is the selection of the most suitable mortgage. Beyond the commonly recognized types such as fixed-rate and adjustable mortgages, there’s a diversity of available options, including the balloon mortgage. While it’s not suited to everyone, a balloon mortgage can offer some unique advantages.
What exactly is a balloon mortgage?
A balloon mortgage typically lasts for a shorter time compared to other mortgages – generally five to seven years. At the end of this period, as the homeowner, you’ll need to pay off the principal, refinance your home, or put it on the market.
Why you might consider a Balloon Mortgage:
Low Interest Rates: One of the reasons you might prefer a balloon mortgage is that it often offers lower mortgage rates compared to adjustable or fixed-rate mortgages. This is because the loan’s short span reduces the lender’s risk exposure, allowing them to offer better interest rates.
Reduced Monthly Payments: Balloon mortgages are an attractive option if you prefer less hefty monthly payments. A blend of lower interest rates and smaller monthly payments can be appealing, especially if you plan to sell your property before the balloon payment is due.
Greater Mortgage Amount: Balloon mortgages may enable borrowers to qualify for a larger mortgage amount, which can be beneficial if you expect an income surge or substantial windfall.
Easier Refinancing Mechanism: Some balloon mortgages facilitate refinancing at the term’s end without the need for a new home appraisal, making the process easier and less costly.
Potential to Benefit from Interest Rate Reductions: If mortgage interest rates are on the decline but you’re eager to enter the market, a balloon mortgage may be your best option. You can refinance at a lower interest rate when the balloon payment is due.
Despite the noted benefits, opting for a balloon mortgage involves some risks. You may end up unable to refinance or pay off the principal when the time comes. Even if you manage to refinance, you could end up with a higher interest rate, leading to increased monthly payments potentially. Many lenders steer clear of such mortgages. Hence, it’s advisable to only resort to a balloon mortgage if you plan on staying in the house for less than the duration of the mortgage loan, or if you intend to modify and sell the house quickly.
