It's exciting to finally be able to buy your house because you got the mortgage you wanted. There are a lot of ways to get a mortgage, but a balloon mortgage may be what you need to move in. Here are some things you need to know about balloon mortgages so you can decide if this type of mortgage can help you.
Like a regular mortgage, a balloon mortgage is taken out for 30 years, but it is paid back much faster. These are usually paid back in 5 or 7 years, but a 15-year option has become very popular in recent years. When this time is up, the mortgage is due in full and must be paid off. Since the balance is still pretty high, most people can't pay it off. However, there is always the option of refinancing at the market rate at the time.
In some ways, this makes a balloon mortgage like both a fixed-rate mortgage and an adjustable-rate mortgage (ARM). It's like a fixed-rate mortgage in that you pay the same amount each month for a set amount of time. On the other hand, a balloon mortgage is like an ARM because the guaranteed level of interest goes to an unknown rate, which is whatever the interest rate is when you refinance.
The monthly payment for a mortgage with a balloon payment is the same as the payment for a mortgage with a fixed rate because it is based on the whole loan period, which is 30 years. All mortgages with a balloon payment are based on a 30-year time frame. The only difference is that full payment is due sooner.
A balloon mortgage is good because it lets you pay less than you would with a traditional mortgage. Most of the time, your payment will be a little less than if you had a normal mortgage. This, though, also means two things. First, it means that you aren't paying much more than interest over the short term of the loan. It also means that you aren't putting much of your own money into the home during that time.
At the end of the agreed-upon amount of time, which could be 5, 7, 15, or another number, you must pay off the rest of the mortgage. You will benefit more from a balloon mortgage if you plan to sell the house before the balloon payment is due or if you plan to refinance. When you refinance, you have to take a chance on the new interest rates, which could be good or bad at the time. In the first contract, there will be rules about how this kind of contract can be paid off again. But this may be something that can't be changed. Which means, simply, that most of the time, it's better to refinance through a different lender.
A balloon mortgage is a good choice for someone who knows they might not stay in one place for a long time. Another option is if you know you can take the rest of your lower payment, reinvest it in something that gives you a higher rate of return, and then use that money to pay off the balloon mortgage at the end of the term.
