What You Should Know About Using Balloon Mortgages

If you're purchasing a home, it helps to know what all of your mortgage options are. While some mortgages are not traditional 30-year loans, they may be ideal for your situation. If you've never heard of a balloon mortgage before, here's what you should know about them.

What Are Balloon Mortgages?

For traditional mortgages, the payment that you make each month will be the same during the entire mortgage payment schedule. This is quite different from how balloon mortgages work. Instead of fixing the rate for the loan's duration, the rate is only fixed for a certain amount of years. Once the initial term expires, the rest of the mortgage must be paid off in full. Balloon mortgages are essentially short loans with a large payment at the end.

Why Use Balloon Mortgages?

There are many situations where balloon mortgages can be beneficial. They do have a low interest rate when compared to a 30-year traditional mortgage, so if you are flipping a home or not planning to live in it very long, you can save money with a balloon mortgage. Instead of most of those initial mortgage payments going to interest, more of it will go toward paying off the principal on the loan.

Balloon mortgages don't require a big down payment. If you do not have the cash on hand at the moment but know you will in the future, a balloon mortgage will allow you to get the home that you want.

Why Avoid Balloon Mortgages?

The biggest drawback to using balloon mortgage is the risk of losing the home. If you change your mind about how long you want to live in the house, you may have no choice but to sell when the large balloon payment comes up. If you do not have the money in savings to pay off the entire mortgage, selling is the only option.

While refinancing is an option to save your house, it may not be possible to do it. Balloon mortgage have less strict requirements to get them, while more traditional loans do. You still must meet the requirements of a traditional loan when you want to refinance with that method.

In addition, there is the risk of interest rates increasing when you go to refinance. You may have been better off getting a 30-year mortgage at the start when interest was cheaper.

Speak to online mortgage companies for more information about balloon mortgages to see if one would be right for you.