Balloon Mortgages

Balloon Mortgages are a special sort of fixed-rate mortgages that offer relatively low, fixed payments just as though it were a standard 30-Year Fixed-Rate mortgage plan. Consumers should be aware that after a few years, typically five to seven years, the mortgage term ends with a single large payment – the balloon – for all the remainder of principal. Consumers generally have the option to refinance their balloon mortgage loan to a fixed-rate loan at the end of the term period. Since the term is actually very short, the total interest paid out is substantially less than a conventional mortgage loan thereby making this an excellent choice should the consumer not plan to stay in the home they are buying for very long. Should a consumer sell before the loan becomes due, the “balloon payment” will not be an issue.

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About Balloon Mortgages

Any Other Details or a Recap Overview?
Balloon mortgages are short-term fixed-rate programs with fixed monthly payments based typically on a 30-Year Fully Amortizing Schedule and a lump sum payment at the term-end. Typically, they have terms of 3, 5, and 7 years. Balloon mortgages with refinancing election allow consumers to convert at the end of the balloon period to a fixed-rate mortgage. This would be based upon the outstanding principal balance if certain conditions are met. Should the consumer refinance at maturity they will not need to be requalified, nor the property reapproved. Interest rate on the new loan is the current rate at time of conversion. Consumers should be aware there could be a minimal processing fee to obtain the new loan.

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Advantages & Disadvantages of Balloon Mortgages

The premium advantage(s) of Balloon Mortgages are: 1) Good selection for consumers who do not expect to own their home past the maturity date when the balloon payment is due; 2) Short term mortgage loan with equal payments; 3) Usually lower payments than conventional fixed loans; 4) Lower interest rate than a long-term loan.

The main disadvantage(s) of Balloon Mortgages are: 1) Toward the end of a few years, the consumer must sell their home or refinance since all remaining principal is due; 2) Should a consumer need to refinance, interest rates may be much higher than when they obtained the balloon mortgage loan; 3) Consumer may end up owing remaining principal balance plus additional settlement costs should the home not appreciate.

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