In today's economy, lenders can offer loans for almost any situation. One type of loan is a balloon loan, but if you aren't careful, it can hurt you in a big way.
Balloon Loans
A balloon loan has nothing to do with flying around the world in 80 days or with hot air. But if you don't carefully plan when you use one of these loans, your finances will surely go up in flames like the Hindenburg.
A mortgage loan with a fixed interest rate for a set number of years is called a "balloon loan." The interest rates on balloon loans are almost as low as those on adjustable-rate mortgages, which is different from traditional fixed-rate home loans. The term is the problem with balloon loans, though.
Balloon loans have a low fixed interest rate for a set number of years, but there aren't many of those years. Most balloon loans have a term of seven to ten years instead of fifteen or thirty years, depending on what the lender was willing to give you. At the end of the term, you have to pay back the full amount of the balloon loan. Yes, completely. Let's take a look at what could happen.
You find a home you love in 2005, but you can't get a loan. Because you are so interested in the loan, you find a lender who is willing to give you a balloon loan. The loan is for $400,000 and will be paid back over 7 years. At the end of seven years, you will have paid $50,000 toward the loan, but you will still owe $350,000. Somehow, you'll have to come up with $350,000 to pay off the loan. If you don't, the bank will take the house back.
Everyone who takes out a loan with a balloon payment has every intention of refinancing the property before the balloon goes up. This makes sense, but you should remember that refinancing is not a sure thing. Maybe you can, but maybe you can't. Also, we have some of the lowest loan rates that have ever been seen. There is a good chance that rates will be much higher in seven years. Are you sure you'll be able to pay those prices?
The whole point of balloon home loans is to look ahead. In a way, you're reading the tea leaves and making a bet about interest rates in 2012 or so. If you get it wrong, it can be a nightmare for your money.
