Even though everyone is busy and in a hurry these days, you can still get a mortgage that way. But the speed and rush of getting a mortgage for that home you really wanted may have kept you from finding out what you were really getting into. More and more people are getting balloon mortgages, but are they as good as some say? Here are some things you need to know about balloon mortgages before you sign one.
A 30-year balloon mortgage is the same as any other mortgage. One difference is that it never pays off in full. Most of the time, you have to pay them off in full after 5 or 7 years, but some last as long as 15 years. Like a normal mortgage, the payments are based on a 30-year period so that they are the same each month.
The "balloon" part is what makes the difference. A balloon mortgage is like a balloon in that it is big and can get in the way at any time. When the 5, 7, or 15 years are up, you have to pay back the whole amount. Most people can't pay such large sums of money in such a short amount of time, so the mortgage will need to be refinanced, or you could sell the house early or lose it.
In most contracts, there is a guarantee that says you can refinance. This should give you some peace of mind, but you should also know that if you only refinance when the loan is due, you may be stuck with the interest rate at the time. It could be a lot more, and so would your monthly payments. In reality, though, the lender might not let you refinance if you missed even one payment in the year before you tried to refinance. If the interest rates are high, you might not want to refinance. You could lose the house either way.
The amount of equity you will have after 5 or 7 years is also a problem. There won't be much equity built up, which could leave you with a very bleak future because even if you sell the house, you might not get enough to put a big downpayment on another one.
If you plan to live there for a long time, it's probably best to get regular financing. One big benefit is that you can choose a time when interest rates are low so you can think about refinancing if you want to, instead of being stuck with the rates when you have to. Aside from that, knowing that the rates are stable gives you and your family more peace of mind (unless you get an ARM).
A good customer for a balloon mortgage is someone who knows they will only live in an area for a few years. The steady payments give them a chance to own a house with reasonable payments and give them time to sell the house so they don't have to refinance to keep it.
