A short-term mortgage, called a "balloon mortgage," is usually only for five to seven years. It works like a fixed-rate mortgage in that you make payments every month, but at the end of the loan term, the last payment is much bigger than the others to pay off the rest of the loan.
So, there are some things you should think about before you apply for a balloon mortgage.
- How much is the interest? Just like with any other mortgage, you'll want to know what the interest rate is. In a balloon mortgage, the interest rate is usually set for a certain period of time. It may have a lower interest rate for the first few years, but this really depends on the lender, and you should find out about this before you commit to anything.
- What do you need to get an application? Applying for a balloon mortgage is similar to applying for a regular mortgage, and you'll probably need the same papers and documents as you would for a regular mortgage. But you should ask the lending company what paperwork you'll need to have ready.
When is the balance too much? In a balloon mortgage, you pay back a portion of the loan in equal instalments, but the last payment can be a big one, and you have to pay off the whole balance. So, it's important to know ahead of time when this is going to happen so that you can either make other financial plans or start saving money for that fateful day.
- Is it possible to lose the chance to refinance? Sometimes, a refinance option comes with a set of rules, and one of those rules is that you have to pay on time. Find out what can cause you to lose the option to refinance so you can follow the rules and still have it at the end of the loan.
- Is it possible to refinance? Since most people won't have enough money to pay the balloon payment all at once, it's a good idea to ask if the loan has refinancing options so that when the loan is due, you can refinance and make a new payment plan.
- Would you have to meet certain criteria to refinance? Some people with a balloon mortgage have the option to refinance, and some lenders will want to reevaluate your ability to pay. Find out if you will have to take some kind of test, pass it, and sign some documents before you can refinance.
Can you pay back the loan? Before you agree to any kind of loan, you should look at your lifestyle, spending habits, and other financial obligations to see if you can afford not only the monthly payments but also the lump sum at the end.
- What could go wrong? Before you agree to a mortgage with a balloon payment, you should be ready for the unexpected and your worst-case scenarios. What if you get fired? You should think about your own finances as well as the economy of the country as a whole.
What do other people think? When you're trying to get a mortgage, you might be too close to the situation to be able to judge it objectively. It wouldn't hurt to talk to a professional in finance to find out if this is the right thing to do.
If you've gone through all the steps and answered all the questions above to your satisfaction, you'll know if a balloon mortgage is right for you.
