Posted on: 6 July 2016Share
For many homebuyers, a balloon mortgage is the ideal method of obtaining the finances needed to buy a home. The mortgage type has many benefits, but there are some drawbacks to consider. If you are interested in a balloon mortgage, here is what you need to know.
What Is a Balloon Mortgage?
With some mortgage types, when you purchase a home, the monthly payments tend to remain the same throughout the course of the loan repayment period. A balloon mortgage operates in a different manner.
When you have a balloon mortgage, you have a fixed rate for several years. After that period has passed, you are expected to pay the entire remaining balance of the loan in full. In essence, a balloon mortgage is a short-term loan.
Why Should You Opt for a Balloon Mortgage?
There are several advantages to choosing the balloon mortgage, such as a lower interest rate. Since the loan is considered a short-term loan, it is considered a lower risk, which translates to savings for you on the purchase of your new home.
A traditional home loan usually requires a significant down payment to be approved. As a result, it can be more challenging to qualify for a home loan. By contrast, a balloon mortgage usually does not require a large down payment, which makes it easier for you to be approved for financing.
If you are purchasing the home with the intention of flipping it, selling it during the fixed rate period could save you money and feed into your profit. You will be able to make the improvements to the home necessary while paying the lowest amount possible.
What Are the Drawbacks?
Although there are benefits to a balloon mortgage, there are drawbacks. For instance, if you are planning to keep the home, you have to face the balloon payment at the end of the fixed rate period. If you fail to make the payment, you could lose your home.
It is important to note that you can possibly refinance the remaining balance of the loan. Whether or not you are able to depends largely on if you meet the requirements for doing so.
There is also the possibility that the interest rates will have increased by the time the fixed rate period ends. If so, you could be faced with paying more to hold onto your home.
If you are still undecided regarding whether or not a balloon mortgage is right for you, rely on professionals, such as your realtor, to help you weigh the pros and cons.