A balloon mortgage loan is a form of fixed rate mortgage loan that comprises a fixed monthly repayment schedule and a lump sum "balloon" payment at the end of the term. Typically, balloon mortgage loans are based on the 30 year fixed rate mortgage with the lump sum payment due after a time period of 5 to 7 years. If you are considering this type of financing, unless you have a high degree of certainty that you will have the idle cash to meet the balloon payment at the end of the loan, you will either be forced to liquidate funds to pay it off or consider refinancing options.
The attraction of balloon mortgage loans is that the interest rate on the loan can be lower than fixed loan counterparts resulting in lower monthly payments. This allows the borrower to save additional funds that would otherwise be committed to the mortgage payment. If the income opportunities from saving the additional funds or the potential for likely capital gain that can be realized from selling the home at the end balloon period are considered, balloon mortgage loans can be an attractive option. They need to be considered wisely and weighed up heavily against the risks associated with the options that are likely to present at the end of the loan period.
Refinancing Options For Balloon Mortgage Loans:
If the balloon mortgage loan permits refinancing at the time of loan expiration you will be able to source funds to continue to finance the outstanding balance. Depending on the construction of the loan, you may be required to pay additional loan transfer or new loan application fees. You will also be subject to the prevailing interest rates at the time of renegotiation. This can entail submitting loan documentation to requalify for the loan amount.
The biggest factor to consider with balloon mortgage loans is the end of term financial commitment. As a short term financing option they are attractive. You need to be aware of how long you are likely to commit to your current home and compare it to comparative fixed rate and flexible loan rate options. If you don't have a relatively risk free financial plan that can meet the balloon payment due at the end of the loan duration, or refinancing is not a viable option, the potential risks associated with this type of loan may exceed the potential advantages