Contrary to popular belief, mortgages are meant to fit into one's life either for better or worse. Before locking yourself into a certain type of loan, it is best to know what qualifies you for the loan, and more importantly, what the regulations are on receiving this money. One of the most misunderstood types of mortgages is known as a balloon loan. In simple terms, a balloon payment is one where there is a large, lump sum payment due at the end of a series of smaller periodic payments. These are usually included in loans or leases at the end of the term in which you are paying them for.
Most balloon payments are taken when refinancing or when one is expecting an increase in cash from something such as inherited money, a large tax refund, or expected dividend. There are several different advantages and fall backs to balloon payments. Depending on the type of loan that you need and how you wish to pay this loan off, balloon payments may or may not be the right choice in taking out a loan.
The first advantage to this type of benefit is that the down payment will often be lower than it would normally be. Another advantage is that balloon payments often come with lower interest payments, which causes little capital outlay. If you choose this loan, you will be able to have more flexibility to advance capital during the loan. A third benefit is that the monthly payments will be lower than they would if you didn't have a balloon payment.
It is also possible to convert a balloon payment into smaller payments at any time during your loan if the money that you may receive is not going to come through. It is important to make sure that this is an option before you begin a balloon payment. Another benefit to balloon payments is that the interest rate will not adjust when rates go up on a national level. Once the first rate is set, it will stay in that category. One of the problems with a balloon payment is that the payment at the end will be fairly large. You will have to be careful to decide on whether to make an investment if you do not know if there will be money coming in at a certain time.
Another disadvantage is that the refinancing cost could become a larger challenge and cost more than expected in the end. If the interest rates increase while you are in a balloon payment, you will end up paying additional costs when wanting to refinance at the end. If rates rise more than five percent above the balloon interest rate that you began with, you will have to re-qualify for a loan and have your home reappraised.
This will end up costing you more money in the end than you were trying to save. This is risky because of the fluctuation that happens with rates on a consistent basis. If you catch things at the wrong time, you will have to start the process of taking out a loan from the very beginning, which will end up costing more.
Before getting a balloon investment it is important to check on a number of factors, including the interest rate which you will start out with, when you will owe the balance, the refinance options available, whether you will be able to change your balloon payment to a regular payment and whether you will have to re-qualify for a mortgage when the final payments are due. If you get into a balloon payment, it is important to know that you will be able to get the fixed amount by the time the final balance will be due. It is also important to look into what will happen after this payment is due so that you don't get caught in an endless cycle of having to take out loans for your home. If these factors will fit, then the disadvantages will be of no importance. In my professional opinion, a balloon mortgage is suitable for you if you know that you will have end money, are looking for lower interest rate,s or know that you will be in the home for a defined period of time. If these factors don't fit, or it seems like a risk to get into a balloon payment, than other mortgage and loan options are better to look into.
Tabitha Naylor is an experienced mortgage broker/consultant with Apex Financial Mortgage. For more information, or additional resources on home loans, visit Apex Financial Mortgage